Evan Greenberg, Chairman and Chief Executive Officer of ACE Limited the global multiline property casualty insurer and reinsurer, said that the reinsurance market faces a painful adjustment as the cycle is transformed by competition and increasing levels of capital.
Greenberg said during the firms earnings call yesterday that while the amount of alternative capital in reinsurance, from investors such as pension funds, is growing it remains tiny compared to other asset classes or compared to the insurance and reinsurance business itself.
However Greenberg does acknowledge the way that this new capital when added to the increasingly high levels of traditional capital is changing the reinsurance market, perhaps for good.
Greenberg believes that the P&C insurance and reinsurance market is in a period of transition, heading towards a different kind of cycle, one driven perhaps by competition and capital rather than demand and losses. Greenberg said that while he does not believe that the market cycle will disappear entirely, it will likely not feature the peaks and troughs seen in decades past.
Greenberg said that he expects a more moderated insurance and reinsurance market once we have passed through the period of transition, but the exact size and shape of the market is impossible to forecast with any certainty.
Greenberg discussed the possibility that different lines of business will react in different ways, with some lending themselves to a more data driven approach to underwriting and others remaining a tailored product. In these, more homogenous lines of business where risk and exposure can be thought of in units, Greenberg expects there to be less cyclical movement in future.
Greenberg said that he sees the market becoming more competitive, he also sees the trend towards slower rate increases in casualty and rate declines in property lines of business continuing. He cited human nature as a factor here, that increasingly competitive players seeking growth could exacerbate these trends, saying; “Companies have been outperforming in certain classes and areas of lines of business and other guys are scratching for growth, and they’re saying, ‘I want a piece of that too’, and it becomes a self-fulfilling prophecy.”
Greenberg said that he does not feel that the reinsurance cycle is no more, but will change. He noted however that as an underwriter, if you’re willing to trade market share and take opportunities (or perhaps ride the cycle), you can generate superior returns for shareholders.
Greenberg discussed the need for discipline and to know when to walk away in the current market environment, with the winners likely those who understand the pricing, the risk-reward of the business and have the ability to execute on it.
Finally, Greenberg said that ultimately he sees a painful adjustment ahead for some as they juggle lower profits from property catastrophe business versus moving into other areas of the market, stressing the importance of getting the pricing right.
As we move through this transition Greenberg forecast a messy year, a more competitive market as people search for market share and growth and do it by sacrificing their margins. How will ACE play it, he asked? “We will shrink the business if it cannot earn an underwriting profit, period,” stated Greenberg.