Evolution required for reinsurers and property/casualty insurers: Analysts

The reinsurance industry as well as the entire property casualty insurance sector needs to undergo an evolution, as the profound impact of new capital forces the traditional business model to be disrupted, according to industry analysts.

Some of the leading equity analysts, who track the insurance and reinsurance sector for their investor clients, were speaking at a recent event held by the Casualty Actuarial Society in New York. The event, as with any other insurance or reinsurance industry conference in the last year, saw a focus on alternative reinsurance capital as the panelists debated the level of disruption the entry of new capital has forced on the industry.

Opinions varied on how best to react to the rise of insurance-linked securities and the inflows of alternative reinsurance capital into an already well-capitalised sector. Two of the analysts, Alan Zimmermann, managing director of Assured Research, and Matthew C. Mosher, SVP rating services at A.M. Best, both advised the industry move on to find new opportunities.

These analysts suggested that reinsurers and insurers need to be prepared to work hard to stay relevant, even if that meant abandoning segments of the market to the new capital. “If you are not willing to change with society, you are going to lose your relevance,” commented Mosher.

The other analyst on the panel, Meyer Shields of Keefe, Bruyette and Woods, suggested less drastic action, saying that insurers and reinsurers should attempt to find profitable niches within the affected market segments.

That is a valid strategy for some, as there are areas and specialties where ILS and new capital sources are not currently playing in the market and these can make profitable areas of focus for traditional insurers and reinsurers. Shields also urged re/insurers to remember their responsibility to his clients; “We’re not in the business of solving the world’s problems, we’re in the business of increasing the value for shareholders.”

Zimmerman noted the stark difference between the pre-Andrew reinsurance market and today. Before hurricane Andrew Zimmerman said reinsurers were like huge impregnable castles, with broad customer base and underwriting depth. Today however they seem more like mobile homes, with a greater number than ever before and more competition.

The advances in catastrophe modelling since the time of hurricane Andrew has made it possible for smaller reinsurers, as well as ILS specialists and capital market investors, to achieve a similarly robust view of risk as the largest of reinsurers, with the catastrophe reinsurance market the one most impacted by this change.

The analysts suggested a range of responses which might allow affected insurers and reinsurers to avoid the highly competitive property catastrophe segment while boosting or maintaining profits.

Moving into new lines of business was the preferred route for Zimmerman and Mosher, although they also highlighted growth, perhaps through mergers & acquisitions as a possible route to greater returns. The development of new business is seen as preferable to continuing to underwrite existing lines of business at lower profits.

Shields agreed that insurers and reinsurers need to respond, but also noted that acquiring the underwriting talent and experience to support efforts in new areas of the market is not always as easy as it might sound.

Zimmerman, who has been covering the property casualty market for many years shared data showing that over the last 60 years insurers have returned 8% on their equity, while the broader S&P500 has returned 13%.

With alternative capital and ILS adding competition as well as pressure, and the high levels of capital in reinsurance and insurance meaning that once profitable business is now less so, insurers and reinsurers do face a potential drag on earnings.

Reinsurers have continued to report attractive results in recent quarters, largely helped by low catastrophe losses and positive reserve developments, but as the pressure continues to mount that trend looks difficult to maintain.

Reinsurance share prices have begun to suffer in recent months, as the abundant levels of traditional and alternative capital put pressure on reinsurance rates. These analysts believe that more testing times may see pressure on share prices increase in months to come, which in turn may raise the pressure to become expansive and trigger more interest in M&A.

“You can’t be in a business with growing competition and expect your stock to do well in the long term,” Zimmerman warned and he might very well be right.