Kevin O’Donnell, President and CEO of Bermuda-based reinsurer and third-party capital management specialist RenaissanceRe, said that at a macro level there is evidence of discipline being lost and risk being priced inadequately in the reinsurance market.
O’Donnell made the comments during the RenaissanceRe first quarter earnings call on Wednesday 30th April. His comments were made during a discussion about the upcoming Florida reinsurance market renewals, but given the macro nature perhaps are aimed more broadly at those he feels are currently underpricing risk.
RenaissanceRe itself saw a reduction in its property catastrophe premiums written and managed during the first quarter, reflecting the general reduction in risk adjusted pricing currently available in the marketplace, as well as its own risk appetite. RenRe has said before that it would not write business it did not feel was priced at a level commensurate with the risk involved and O’Donnell now joins those who fear that this is happening in the market.
“At the macro level we are starting to see undisciplined behavior, with some risk being priced below an acceptable level of return for any form of capital,” commented O’Donnell on the call.
One of RenRe’s key strategic aims is to accurately match risk with the capital with the right risk appetite, hence its multiple types of capital managed and owned and its different third-party reinsurance capital vehicles. So this topic is close to O’Donnell’s heart and it’s clear that he feels that discipline is being forgotten in favour of acquiring signings by some in the reinsurance market.
O’Donnell continued; “This behaviour cannot persist permanently in financial markets. On the other hand, it can exist for a long time and pricing decisions made by suppliers are often only revisited after an event.”
O’Donnell said that the general themes in the reinsurance market that we’ve been tracking over recent years continue, with no evidence of them letting up, with supply of reinsurance abundant, traditional reinsurers competing hard to maintain market share and alternative capital competing to find new growth avenues.
Looking towards the mid-year renewals O’Donnell said that he expects the trends to continue unabated. A slight increase in demand is expected in Florida, both for traditional reinsurance and catastrophe excess of loss, O’Donnell explained. However, at the same time both traditional and non-traditional reinsurance markets look to Florida and U.S. peak zone risk as a target for growth, even though pricing is down. Given the abundant supply of capital for Florida renewals, O’Donnell said to expect another competitive renewal.
“We anticipate continued emphasis from buyers on their core reinsurance partners. This could, however, lead to further pricing pressure from those non-core reinsurers looking to increase their participation in Florida with their only means to obtain business to be aggressive on price and conditions,” said O’Donnell.
O’Donnell moved on to discuss the continued expansion of terms and relaxation of clauses, such as the hours clause, in recent renewal seasons. “Expansion of coverage is just another form of price reduction,” warned O’Donnell, adding that RenaissanceRe would watch this closely during the renewals.
O’Donnell acknowledged that he and others had perhaps not expected the high levels of competition and the rapidly softening reinsurance rates to persist so far into the year. It seems that many assumed that a pricing floor would be found before the mid-year renewals, but O’Donnell said there is no sign of a deceleration of this trend and that there is more competition and capital than he had expected.
When asked where he saw the irrational behaviour coming from, whether it was from traditional reinsurance companies or from the ILS market, O’Donnell insinuated that both are guilty; “I think at this point capacity is capacity and we are seeing strong competition coming from all sectors to be honest.”
On the other side of the coin, RenaissanceRe stands in a good position to take advantage of reinsurance pricing to improve its own retrocessional reinsurance protection. O’Donnell said that the firm will remain open to all forms of protection and capital, including catastrophe funds, traditional reinsurance and other forms of ILS.
O’Donnell is not the only person to suggest that pricing discipline is beginning to slip. Earlier this week Validus Group CEO Ed Noonan said that ILS market discipline waning in Florida. But O’Donnell suggests that pricing discipline may not just be slipping in the ILS space, his comments appear more broadly aimed, that certain players from all forms of capital may be at risk of driving prices too low for the exposures they are assuming.
Those who do lose discipline will risk being bitten should the 2014 Atlantic hurricane season throw up a landfalling storm or two. It will not take much, at least not as much as in previous years, for attachment points on reinsurance policies to be reached this wind season with coverage terms expanded and lower pricing helping cedents buy cover lower down.
Dropping your pricing too far, while giving away too much, is a very risky strategy. The reinsurance market has been caught out for this in the past. Let’s hope for the market’s sake that any lack of discipline is restricted to the few and the majority continue to underwrite with their capitals risk appetite in mind.