Market pressures raise differing opinions on reinsurance cycle

With the soft re/insurance market cycle ongoing, exacerbated by ample capacity, a supply/demand imbalance and benign loss activity, industry experts have discussed whether the reinsurance cycle has as much of an influence on the market today as in the past.

As reinsurance companies continue to try to navigate the current soft market conditions, through consolidation efforts, pulling-back on certain business lines and redeploying capital into areas with more desirable returns, and in some cases ceasing to write business in competitive, pressured lines all together, noise of a ‘new normal’ and a ‘structurally lower’ return environment have circulated.

Speaking with A.M. BestTV at the recent reinsurance industry event in Monte Carlo, numerous executives from the reinsurance landscape discussed the impacts and trends of the insurance market cycle, and whether this has changed over time, with some divided opinions.

With talk of a new normal circulating the industry, Tad Montross, Chairman and Chief Executive Officer (CEO) of General Re Corp., a proponent of the traditional model, claims that the real question is whether the change that the industry is witnessing is secular or cyclical.

“I would argue vehemently that it’s cyclical change,” said Montross, continuing to predict that when the benign loss activity, low-interest rates and other market factors reverse, which Montross feels they will, people “will look back and say this is just sort of a normal cycle but with a lot more capital that was accessible than back in 2000.”

The glut of alternative reinsurance capital, on top of the existing and flowing capacity from traditional players, has exacerbated the soft reinsurance market, and as its presence is felt beyond U.S. property cat exposures primary lines have started to increasingly feel the impacts.

A.M. Best highlighted the impact of third-party capital and the convergence market on the reinsurance cycle not so long ago, predicting that it would lead to a dampening of reinsurance price volatility and a flattening of the traditional market cycle.

Other executives, such as Lloyd’s of London CEO, Inga Beale, would rather think of this as a modernisation of the reinsurance market, resulting in less requirement for the peaks and troughs of the cycle as had been seen historically.

“With all the money we’ve invested in modelling, trying to understand exposures, trying to understand technical price, I would love it if we could sort of start eliminating the use of the word cycle,” she explained.

Further adding; “At the end of the day we want to provide our customers with a fair product for a fair price, reflecting their exposures. The more we can really drive that through and make sure that we’re not just going through cycles based on how much capacity or capital is out there, I think that puts us in a much firmer footing for the future.”

While in theory the elimination of a market cycle might sound promising and have its advantages, Jeremy Pinchin, CEO of reinsurer Hiscox Re feels the cycle is here still, but that it will likely take a bigger, different, seismic event to “try and change the nature and bring back the cycle in the full extent.”

“But I don’t think it will ever quite go away from the industry,” confirmed Pinchin.

Reinsurer Guy Carpenter also commented on the apparent change to the traditional reinsurance cycle, noting that the market cycle now responds differently to loss events, with a reinsurance market that responds locally and regionally to losses expected to be the norm going forwards.

Mid-year renewals signalled the first time in a while that rate decreases in the reinsurance sector began to decelerate, across certain business lines, as the flow of alternative capital slowed somewhat and underwriting discipline remained.

But that doesn’t mean that pricing in the sector has reached a bottom and that rates will begin returning to more desirable levels for reinsurers or investors seeking higher yields than are currently available.

There is still a continuation of benign loss activity, low-interest rates and heightened competition across a growing number of business lines, as institutional investors increasingly look to broaden the areas of the re/insurance market where they can deploy capital, as rates in the property cat arena remain depressed.

Furthermore, with alternative capital unlikely to leave the market anytime soon, even after a large-event, according to the majority of industry experts and analysts in recent times, and traditional capital still at record levels, the cycle could remain much flatter going forwards.

As a result, it could be some time before we see any meaningful turn in the soft reinsurance market and an opportunity for the cycle to be quantified and identified as to whether it still even exists, as it had been previously known.