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Alternative capital changes reinsurance underwriting behavior: Charman


The continued influx of alternative reinsurance capital from third-party and institutional investor sources into the reinsurance market has led to increased competition and changes in underwriting behaviour, according to Endurance CEO John Charman.

Charman, speaking at the recent Standard & Poor’s Ratings Services annual insurance conference in New York, discussed the alternative capital trend alongside a number of other reinsurance industry CEO’s highlighting the importance of differentiation and underwriting discipline at traditional reinsurers.

With reinsurers facing weakening profits, increasing amounts of alternative capital, high-levels of traditional reinsurance capital, pricing pressure and low investment yields, the CEO’s of these reinsurers told the conference that mergers and acquisitions activity and strengthening underwriting are key to enabling the sector to continue to deliver attractive returns.

On alternative reinsurance capital, Charman said; “That flow of capital into our business in search of higher returns is inevitable. It’s created a more-competitive landscape, and it’s also changed underwriting behavior.”

Charman explained that reinsurers are now embracing third-party and alternative capital as managers of institutional money and by sharing access to their underwriting portfolio with investors, by establishing sidecars and new units dedicated to leveraging alternative capital.

Charman said that the trend for increasing alternative capital in reinsurance had; “Accelerated competition within the market.” But he added that the new capital is; “Strong, healthy competition that we’re facing.”

Charman stressed the need for reinsurers to play to their strengths by focusing on underwriting and their internal expertise, the elements that allow them to differentiate or distinguish themselves from the competition.

“The secret of underwriting is to have an embedded knowledge of the underlying risk, to be able to manage exposures and risks;” explained Charman, adding that underwriting discipline is important at this time throughout the reinsurance business.

Dinos Iordanou, Chairman and CEO at Arch Capital Group, said that he thought the entry of alternative capital and institutional money into reinsurance would be more permanent than had been seen in previous waves.

“The new influx has more permanence because the investors are looking to invest new capital,” Iordanou said. He continued to explain that new capital backers are putting in considerable time and effort into making the right partnerships and investing in the right underwriting facilities, making it less likely they would pull out quickly. “It’s hard to disband that formation of capital in a short period of time. Exits are more difficult,” he added.

In terms of pricing, which has been on a steady decline with the latest renewals at June 1 seeing more double-digit price declines, Charman said he feels the market is nearing the bottom.

“We are beginning to get to the bottom of a very aggressive pricing cycle. You always know you’re getting to the bottom when terms and conditions start to expand,” said Charman. He continued, saying that when the business begins to feel it is not being paid adequately for its reinsurance underwriting it is inevitable that it will step back and that this has begun to happen.

Iordanou said that the market was still delivering healthy business even after the pricing drop at recent renewals. However he did not agree that market dynamics are particularly healthy or that pricing is nearing a floor, saying; “You create this frenzy of competition, and in my 38 years in the business, it usually doesn’t end very well. One person’s little aggression turns into the next person’s bigger aggression. To tell you the truth, I don’t know the end of it. There’s no indication of prices stabilizing.”

Denis Kessler, Chairman and CEO at SCOR SE, discussed the tiering in the market, explaining that this is not just tiering by size but also by quality and underwriting expertise. Tier 1 companies are able to meet clients needs and demands, he explained, but tier 3 might struggle and he said that these reinsurers do not have what it takes to survive in the current market environment.

That took the conversation onto mergers and acquisitions (M&A), an area that of course Charman had considerable room to comment on given Endurance’s approach for Aspen.

The CEO’s believe M&A is inevitable in the current market environment and said it is largely for the good of the sector as the industry needs to maintain its returns to its investors and the only way to do so in this environment is by acquiring scale.

Size and ratings will give you a chance to explore the opportunities of the current market environment, said Iordanou, but then you need to be able to differentiate on capabilities he stressed.

It is not just scale alone that will help reinsurers survive in the currently competitive and capital pressured reinsurance market. An element of differentiation, innovation and an ability to move quickly are also vital. Of course these are traits that some large corporations find very difficult to achieve and sometimes the smaller players can move more quickly. That does perhaps, in our opinion, hint at continued growth opportunities for the more nimble, innovative, technology driven and lower-cost ILS players in the current market environment.

While underwriting behaviour may be changing, in some cases perhaps for the worst in terms of relaxation of terms and assumption of increasing levels of risk, changing underwriting strategies may also hint at a further evolution of the reinsurance market as it begins to really appreciate its cost-of-capital and ability to assume risk.

With ILS players and alternative capital leading the way on demonstrating where risk appetite and capital return requirements meet in the middle, perhaps reinsurers are also beginning to follow this lead. With shares being repurchased and capital returned in the form of special dividends, the reinsurers may be setting themselves up for a more nimble, innovative future, with behaviour change occurring right across the reinsurance business, not just in their underwriting practices.

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