Firming possible for “next three to four years”, Stephen Catlin says

Rate firming across insurance and reinsurance markets could persist for the “next three to four years” the CEO of Convex Group told the Financial Times.

Rates have clearly been on the rise in reinsurance and more broadly across insurance lines, as the effects of the 2017 and 2018 catastrophe losses and ongoing loss creep filter through, resulting in a desire to be paid more for taking on risk and to achieve a better return-on-capital across the business.

But the rate increases seen so far aren’t enough, the chief of recently launched specialty insurance and reinsurance start-up Convex told the FT in a recent interview.

Catlin explained that further rate increases are likely, “I’d be surprised if you don’t see another hardening of rates.”

The need for further rate increases is likely to be a hot topic at the 2019 Monte Carlo Reinsurance Rendez-Vous de Septembre which begins this weekend.

Not many in the industry are satisfied with the rate increases seen to-date, although it has made the sector more profitable overall for them.

Most agree that the softening of recent years had been partly stimulated by the dearth of U.S. hurricane and major U.S. catastrophe loss activity over a decade or more.

That came to an abrupt end in 2017 and 2018, thanks to hurricanes and wildfires, while loss creep exacerbated the issue and resulted in a significant impact to reinsurance firms, retrocessionaires and insurance-linked securities (ILS) players.

Japan’s typhoon Jebi and its prolonged loss creep, which has seen the industry loss estimate rise by a multiple of around five, resulting in the largest Japanese typhoon loss in history, appears to have been the final straw, forcing reinsurers to strengthen reserves, ILS players to trap more collateral and retro providers to face increasing losses.

The end result is a more determined view on rates, which Stephen Catlin expresses as a need for the firming to continue.

“You are likely to see a firming market for the next three to four years. Prices are nothing like what they were and a lot is still underpriced,” he stressed.

Catlin also believes that after the recent years of heavy catastrophe losses the likelihood of rapid ILS market growth is much lower.

Explaining, “A lot of people have invested without understanding it. I think the heat on alternative capital is greater than the heat on the traditional market. I’d be quite surprised if there was an [influx of fresh money].”

Of course investors were happy to help Catlin himself raise $1.8 billion for the launch of his new re/insurer Convex, demonstrating the appetite for investments in areas exposed to insurance related risks persists.

At the same time, there is also evidence of capital raising ongoing in some areas of the ILS market currently, as well as some new initiatives underway that could bring new investors to the ILS market.

Hence, while Catlin’s certainly right that the ILS market came under significant scrutiny from its investors, due to its more direct relationships with them than most reinsurers have with their equity holders.

It might be a little rash to write-off the chances of ILS market growth returning in early 2020.