While property catastrophe reinsurance pricing is generally accepted to be the line of business that has suffered the steepest decline in rates, the current prices are still attractive and in fact better than insurance on a risk adjusted basis.
That’s according to insurance and reinsurance firm Argo Group’s CEO Mark Watson, who discussed the rate environment recently during an earnings call, saying that Argo still prefers its property catastrophe reinsurance portfolio over a primary insurance equivalent.
“We really like our property catastrophe reinsurance portfolio and the rate that we’re getting, on a risk adjusted basis, as a reinsurer versus a primary insurer for property cat is still better,” Watson explained.
Watson’s comment reflects the feeling among many executives in reinsurance, that while property cat pricing has declined steeply, perhaps as much as 40% or greater in some perils and regions over the last two or three years, it is still more attractively priced than primary lines that take on the same risks.
At the same time Watson feels that while we’ve seen this steep decline in property catastrophe rates, they are not as low as the reinsurance pricing seen prior to the hurricane heavy year of 2005.
Watson explained; “Even though property cat rates have come down they’re still higher than they were pre-Katrina, Rita and Wilma, all those fun events back in 2005.”
As a result Argo prefers to assume catastrophe risk as a reinsurance firm rather than as a primary insurer.
“We still think, on a risk-adjusted basis, we’d rather take some of our property cat risk as a reinsurer than as an insurer,” Watson continued.
And Argo Group is also playing the arbitrage game, making greater use of cheap reinsurance cover to ensure it comes out ahead on its underwriting.
Watson said; “For every dollar of underwriting profit we lose as a reinsurer, as margins compress a bit, we’re gaining a dollar as a buyer of reinsurance and so, net-net, we’re actually coming out ahead as reinsurance pricing softens.”
“We are an insurance company first. The only reason that we’re in the reinsurance business is, on a risk adjusted basis, we think we get a better property cat return as a reinsurer than as a direct insurer,” Watson concluded.
Argo thinks about property catastrophe risks a little differently to some other re/insurers, but of course it is still exposed to the same pressures as everyone else, which Watson acknowledged.
“It’s a tough environment out there. Competition continues in virtually all classes of business that we underwrite. More capital continues to flow in from the capital market,” he said.
By using property catastrophe reinsurance underwriting strategically alongside purchasing reinsurance covers of its own, Argo Group can perhaps better sustain the price declines than some other re/insurance firms. However it is still only a small part of its business and as the market softening spreads perhaps Argo will feel it more.