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Casualty reinsurance, advantageous but high entry barrier: Goldman Sachs


While the reinsurance market remains challenging strategically sound business models become more important than ever and while casualty lines offer several structural advantages, this can mean higher barriers to entry, according to analysts at Goldman Sachs.

Reinsurers are increasingly shifting capacity into casualty lines of business, as they seek to avoid the most competitive parts of the reinsurance market in property catastrophe risks. At the same time alternative reinsurance capital and ILS players are increasingly interested in casualty risks as well.

Examining recent trends and the outlook for European reinsurers in an Equity Research study, analysts at Goldman Sachs note the structural benefits of casualty business within a portfolio, and the resulting entry barriers potential investors are faced with compared to property lines.

Generally, notes the report, solid, long-standing relationships with clients are a vital part of European reinsurers’ business models, and due to the unpredictable, sporadic nature of casualty catastrophe risks it becomes even more essential when dealing with this business line.

“The longer duration of casualty liabilities means that the risks are more difficult to underwrite, requiring expertise. It also means that the business is more relationship-driven, and less price-sensitive than the shorter-duration property business,” explains the report.

Additionally, Goldman Sachs says, “existing clients are less likely to switch reinsurers easily, and the pricing cut offered to win business from a peer would have to be higher, offering an advantage to incumbents.”

Owing to the longer duration of casualty risks, a lack of historical data and sparse, advanced technological capabilities, especially when compared to property catastrophe risks, cedents require longer-term, reliable partners for their casualty business, which can prove somewhat more difficult to achieve than building shorter-term relationships to cover property cat exposures.

An article on the inherently difficult task of modelling casualty catastrophe risks by Guy Carpenter (GC) late last year, succinctly describes some of the issues with casualty business lines, covered at the time by Artemis.

“Casualty catastrophes, unfortunately, do not follow patterns, unlike property catastrophes,” said GC.

Continuing to explain that casualty catastrophes “rarely arise from the same conditions, or whose triggers emanate from the same companies or industries, as their predecessors.

“In fact, many potential casualty catastrophes (especially those in the broad “technological” emerging risk category) are still considered “black swans,” to at least some of the re/insurers that cover them. Some can appear out of nowhere and wreak havoc quickly.”

As commentary in the global re/insurance sector continues to discuss the persistent influx of alternative capital, the difficult modelling conditions, unpredictability and long-term relationship nature of casualty business has meant it’s difficult for alternative capital providers to increase their presence in the sector.

And while the re/insurance market remains awash with surplus capacity, adding pressure to rates and exacerbated by benign catastrophe losses, the capital would be put to good work protecting companies and economies against the increasing severity and frequency of casualty catastrophe risks, including cyber, D&O and so on.

It’s certainly an area investors would be keen to participate in as it offers diversification, a lack of exposure to peak perils such as natural disasters and typically a higher discount environment owing to the longer duration of the liabilities, explained Goldman Sachs.

But as noted by the firm in its report and previously by other industry experts, the barriers to entry are higher than with property catastrophe risks due to structural reasons and casualty’s inherent complexity and uncertainty.

However, recent developments with casualty-specific modelling platforms and advanced enterprise risk management (ERM) has signalled that the industry is moving in the right direction, as institutions and governments seek to mitigate the potential impact of a large casualty catastrophe event, like the financial crisis during 2008.

In fact, the reinsurance brokerage arm of Willis Group Holdings Limited, Willis Re, recently announced the launch of PRIMO, a casualty reinsurance facility aimed at providing cedents with comprehensive protection against casualty catastrophe events, and could also serve as an entry point for ILS, and other alternative risk-transfer investors looking to access the benefits of the casualty space.

Also read:

Willis Re launches $400m casualty catastrophe reinsurance facility.

Casualty catastrophe risks remain (mostly) out of reach of ILS capital.

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