Bart Hedges, CEO of Greenlight Capital Re, the Cayman Islands reinsurance firm backed by hedge fund manager David Einhorn, said that there is room for catastrophe reinsurance pricing to drop further, as the floor on natural catastrophe pricing has not yet been reached.
During the hedge fund backed reinsurers third-quarter earnings conference call, CEO Hedges discussed the catastrophe reinsurance market. Hedges said that the market continues to be competitive, with ample capacity available from both traditional reinsurers and non-traditional reinsurance capital sources.
The high levels of capital in the catastrophe reinsurance market, both from well-capitalised reinsurers and the influx of alternative capital from institutional investors and the insurance-linked securities (ILS) market, have helped to push down catastrophe reinsurance pricing in 2013. Hedges believes there could be more declines to come.
Hedges commented; “The market for natural catastrophe reinsurance continues to be competitive with plenty of capacity being offered by both traditional and non-traditional sources of capital. The floor on pricing per contract exposed to natural catastrophe has not yet been reached.”
Greenlight Re continues to underwrite some catastrophe retrocession contracts, reinsuring primary writers of catastrophe reinsurance, explained Hedges. But the reinsurer will not continue if prices become unattractive. Hedges said that Greenlight would pull back from this type of business if it became unprofitable, commenting; “While pricing for our products is competitive, if the price drops below a level that we believe provides a sufficient risk adjusted return, we will cease underwriting in this area.”
Greenlight Re adopts an approach which will see it move to lines of business where it finds risk adjusted returns more acceptable should catastrophe pricing come down further. Hedges comment that the pricing floor for natural catastrophe reinsurance has not yet been reached does not necessarily mean we will find that floor in this cycle. Rather he is likely referring to the fact that there is capital in the reinsurance market right now, and capital wanting to be deployed into reinsurance, that can go lower.
Frank Majors, co-founder and principal of ILS manager Nephila Capital, echoed this in his recent speech to the London insurance market. Majors said; “Frankly we don’t actually know where the floor price is, but it’s not the current market.”
Again, this doesn’t mean we’ll see this floor in January at the reinsurance renewals, or even in the next year. It does suggest that over time the market is going to have to get used to accepting lower risk adjusted returns for natural catastrophe risks and that certain peak perils, which are well modelled and understood by the market, may see pricing drop further and more quickly.
Greenlight Re, as a reinsurer following the hedge fund style investment approach of lower volatility underwriting and more active investment of the resulting premium income or float, will find new areas of the market which match its risk adjusted return targets. Other, more peak catastrophe reinsurance strategies may find the pricing floor a little more difficult to manage.