Capital creates competition in casualty reinsurance, where next?

The casualty reinsurance market is becoming more competitive and one of the main reasons is the flow of new capital, including third-party or alternative reinsurance capital, into property reinsurance, which is pushing reinsurers to look elsewhere for profits.

The latest evidence to this effect comes from a professional liability focused insurer. ProAssurance sells professional liability insurance cover to healthcare professionals, including doctors. Comments made during its fourth-quarter earnings call provide the latest anecdotal evidence that capital flow into the reinsurance market is creating broad softening in other lines.

ProAssurance is finding that casualty reinsurance market conditions are beginning to look softer and it looks forward to benefitting from more attractive reinsurance pricing as this trend continues. If the market continues to soften ProAssurance will take full advantage by buying greater levels of protection, executives said.

The impact of alternative reinsurance capital on the casualty reinsurance market has the potential to be as profound, if not more so, than its impact on property catastrophe reinsurance over the last couple of years. Casualty insurers have long used reinsurance sparingly, due to the cost and sometimes lack of availability of the reinsurance options they need, meaning that the market could be ripe for expansion if these conditions change

With competition heating up in the casualty reinsurance market and new options coming from third-party capital backed and collateralized reinsurance solutions, the size of the casualty reinsurance market could grow as ceding insurers look to become better protected.

If the steadily growing influence of alternative reinsurance capital continues to push traditional reinsurance firms into the casualty reinsurance market, while at the same time ILS and collateralized reinsurance players begin to make inroads into casualty risks, the softening trend is likely to continue and competition keep rising.

Howard Friedman, President of the Healthcare Professional Liability Group at ProAssurance, was asked whether the firm would look to utilise reinsurance more. He said; “If the market continues to soften on the reinsurance side and we see the costs of reinsurance below what we think is the cost of actually covering that layer or area of business itself, we would certainly try to do that.”

Friedman went on to say that the last time the firm was able to economically benefit from greater reinsurance purchases and reduced retentions was in the 1990’s. At that time the casualty reinsurance market was much softer than today and claims generally lower. If the market could get back to those levels of pricing in the current liability environment it would benefit insurers like ProAssurance greatly.

Friedman said that the firm was able to improve its reinsurance treaty terms marginally at its latest renewals. He then commented on reinsurance market conditions, saying; “We do see more reinsurers having an interest in the casualty lines, I think because of all the capital that’s flown in on the property side, and they are looking for other opportunities and because of that, the casualty area is becoming more competitive as well.”

This trend, of traditional reinsurers moving into other lines of business to avoid the pricing compression in property catastrophe reinsurance, is likely to broaden to other lines beyond casualty it should be expected. If the reinsurance market remains free of large losses and ILS and alternative capital continues to eat away at what was once the core domain of reinsurers then the search for profitability may spread wider.

That could result on general softening in much broader swathes of the global reinsurance market over time, while ILS and alternative capital continues to focus on its sweet spot of property catastrophe risks while all the time pursuing initiatives to broaden its reach as well.

Where next is hard to say, but it stands to reason that marine, energy, terrorism, space risks and perhaps crop could all feel pressure, as they are lines that traditional reinsurers may look to increase exposure to, while ILS and alternative capital may begin to play more in those areas as well.

The end result? Further squeezing of reinsurers margins, more aggressive competition and relaxation of terms by traditional players, more reinsurers managing third-party capital for to benefit from the lower-cost of it and more reinsurance buying opportunities for primary insurers.

Once again the reinsurers that look healthiest will be the ones with diverse strategies, those that innovate, or who look to create new product lines, or move into new regions and or seek to reduce their own cost-of-capital, either by managing third-party money or cutting expense ratios.

Of course this could all change with a strong showing of the Atlantic tropical winds come June.

Read this other recent article: Third-party capital’s impact on casualty reinsurance market growing.