Alternative reinsurance capital more disciplined than you think

Discussion on the topic of alternative reinsurance capital providers and insurance-linked securities managers level of discipline has been rife in recent months, but they are more disciplined than you think according to XL Group CEO Michael McGavick.

The word discipline has featured strongly in the global reinsurance market over the last year, with some suggesting that ILS capital and alternative reinsurance capital lacks discipline and is willing to be put to work at too low a cost or with insufficient underwriting experience and skill.

The word discipline has also featured in market discussions about the recent January reinsurance renewals, with some suggesting that it is traditional reinsurers who have lacked discipline in their struggle to remain competitive in the face of rising volumes of lower-cost, more efficient third-party reinsurance capital.

Michael McGavick, CEO of global insurance and reinsurance firm XL Group, raised this topic during the firms fourth-quarter earnings call last week.

XL Group itself is increasingly involved in managing third-party reinsurance capital through its New Ocean Capital Management unit, so it could be said that McGavick has a vested interest to support alternative capital, however his comments were measured and interestingly perhaps point the finger more at traditional reinsurance players than non-traditional capital.

McGavick was responding to a query on how XL Group would react to a continued influx of alternative reinsurance capital, with continued rate pressure as a result of the alternative and ILS players lower cost-of-capital, continuing to push down reinsurance rates until they became inadequate for traditional reinsurers.

McGavick said that the recent January reinsurance renewal season gave him more cause to feel comfortable than to feel frightened. He said that there was a good deal of frenzy going on in the reinsurance market, but; “Generally speaking it wasn’t so much what the alternative capital guys were pricing at it was the frenzy among the existing players not to lose share in reaction.”

On the alternative capital players, McGavick said; “They were more disciplined than I think some are thinking. Some are thinking that the alternative guys just came in and whacked the market. No, what happened was the traditional players were so focused on keeping those shares that they got engaged in their own little frenzy.”

McGavick acknowledged that alternative reinsurance capital and ILS players were not irrational, saying that he would not have expected them to be.

McGavick continued; “So I don’t feel the alternative guys, and I certainly know I don’t expect our alternative guys, are going to be somehow irrational. I think they have a different set of costs. They have different appetites and they’ll play that card.”

Discipline, in terms of underwriting and deployment of capital whether traditional or non-traditional, is likely to be a hot topic through 2014, with rates down and competition high. The temptation to take on that little bit more risk, or to expand terms that little bit more than before, is going to be strong for both camps at the key U.S. property catastrophe reinsurance renewals.

The mid-year June/July property catastrophe renewals may be the biggest test of discipline that the ILS and alternative reinsurance capital market has faced in its near 20 year history. It is also going to be a test for traditional reinsurers and the temptation to relax underwriting controls may be too high for some to resist.