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New capital goes where it’s easiest to deploy: Jay Fishman, Travelers


New capital entering the insurance and reinsurance industry has a tendency to go where it is quickest and easiest for it to be deployed, hence the pressure on U.S. national and large account property business, according to Travelers CEO Jay Fishman.

In Travelers third-quarter results, announced yesterday, it is clear that the U.S. national property account, which includes a much of the large account business, is an area where the insurer is seeing rates decline.

This ties in with analysis of the commercial P&C insurance market, which has seen rates stagnate in recent months and is expected to go negative, led by large property accounts in quarters to come.

When asked whether this is a function of the changing reinsurance market landscape and the entry of new capital into re/insurance, Fishman explained that it is indeed a factor affecting that area of Travelers business.

“Capital goes where it can be most easily deployed,” Fishman said.

“To the extent that new capital comes into our industry, it comes into those areas that are easiest to put capital to work quickly. So you will often find it in large account business, where claim frequency is not an issue, you’ll also find it in unregulated, the non-admitted market E&S,” he continued.

Fishman said that the national and large account property insurance business, which is commercial and the type of risks that are seeing a growing focus from traditional reinsurance capacity providers as well as some ILS investors and managers, is particularly under pressure as it fits this mold of easier to deploy capacity into.

He said; “The large account property business is a really good example of an area where capital can be committed pretty easily, without much infrastructure or regulatory hoops to go through.”

Fishman said that new capital coming into these markets is an “industry phenomena” but that it is exacerbated by other features of these lines of business, particularly that they are still profitable.

Hence rates have some room to decline, so a sector that is attractive as it’s easier to deploy capital into, but that also makes a good return is bound to attract attention from new entrants, capital over-spilling from reinsurance and also the ILS investor community.

Allan Schnitzer, Vice Chairman, CEO of Business and International Insurance at Travelers, and destined to succeed Fishman as CEO gave some more colour on the U.S. national property insurance market.

“The returns in that national property business are very, very attractive. I would say that the pressure we’re seeing from price comes from two places,” Schnitzer said.

However he stressed that Travelers continues to find value in that market as well, adding; “There probably is a component of that’s an easy place for the incremental capital coming into the business to find a home, but also the returns are very, very good and so we continue to have very high retentions and to grow that business.”

As insurance companies like Travelers begin to feel increasing pressure on some of these property and commercial related areas of their core business, they are likely to do as the reinsurers did over property catastrophe risks, shift their own capital.

For the moment the return on capital deployed may still suit Travelers, but if that declines, reducing the profitability of these lines, it may find it more compelling to shift away from these areas of the market.

This emerging trend, of ‘new capital entry – price reductions – old capital shift’, is something we’re beginning to see the start of in many lines of both reinsurance and insurance, as capital finds ways to get closer to the ultimate source of risk.

While the market remains devoid of major losses it’s likely to be a trend that continues to eat away at profitability, increasing the pressure to operate at a low cost-of-capital and with increasing efficiency.

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