It is “completely ridiculous” to blame the current soft state of the global reinsurance market solely on the entry of third-party capital investors and the growth of insurance-linked securities, according to Lancashire CEO Alex Maloney.
Speaking during specialty insurance, reinsurance and third-party capital management company Lancashire Holdings second-quarter earnings call today, CEO Maloney said that traditional reinsurers are too quick to blame everything on ILS and capital market investors.
Maloney, discussing conditions in reinsurance and the insurance-linked securities (ILS) space, said that it’s an interesting trend that we’ve recently seen some of the ILS fund managers pulling back and trying to establish pricing discipline, at a time when other traditional rated reinsurance players have been deploying more capacity.
Maloney said that it’s very difficult to predict where capacity will go in the ILS market and what capacity will remain in it. Some of the ILS markets are professional investors, he noted, meaning that they are looking for a return and hence perhaps more likely to display discipline.
Hence the fact that ILS has been among the first parts of the reinsurance market to pull-back and to push-back on pricing at mid-year renewals, causing a number of contracts to be repriced, suggests that ILS players may be more return driven than having a desire to simply get their capacity deployed.
“You could see an example where, as the market gets weaker, the ILS guys are actually more disciplined than the rated paper. We’re all a lot more emotional about this market than some of those guys,” Maloney explained.
However, as the returns decline Maloney does not expect to see the ILS space grow dramatically.
On ILS capacity he said it’s “very difficult to predict,” noting however that it’s widely accepted that there is a “wall of capital” waiting to come into the reinsurance sector should market conditions improve.
“Like all capital, whether its traditional or ILS capital, there’s some very smart capital there’s some naive more capital,” Maloney continued.
Adding; “It’s just quite an interesting trend that some of the funds are pulling back and some of the rated guys aren’t pulling back at all.”
Maloney then highlighted the fact that, for some traditional reinsurance players, the entry and growth of ILS and alternative capital has provided a scape-goat for difficult market conditions.
He explained; “In fairness to the funds and the ILS guys, I think the rest of the traditional guys would like to blame the whole market on the arrival of third-party capital, but that’s just completely ridiculous quite frankly.”
It’s encouraging to hear some sense on this topic, as too often third-party capital and ILS is blamed for driving rates down single-handed. The mainstream press would have its readers believe that ILS investors and managers are all “yield hungry”, chasing down pricing with abandon.
The truth is much more nuanced, as different investors and managers have differing strategies, risk and return requirements and appetites for assuming risk. The fact that return focused players such as these have been among the first to seek to establish a pricing floor is no surprise, they seek a certain return for each unit of their capital deployed.
The traditional market players need to take shared responsibility for reinsurance rates declining, and if rates have declined too far for their risk appetites perhaps find other avenues for their capacity.
While also admitting to themselves that perhaps times have changed, capital has become more mobile, risk transfer structures support more efficient business models, and that some areas of the reinsurance market have become an asset class with growing investor acceptance.
Maloney also said that he does not believe that recent risk model updates, such as AIR Worldwide’s, will dramatically affect the reinsurance or ILS market. In the current market, he said, it’s hard to see any model update being linked to pricing, he said.
This perhaps reflects a theme from his earlier comments. We’re maybe now seeing a reinsurance market where capital and the ability to expertly allocate risk to the most efficient counterparty, with the right risk/return appetite, is more likely to drive the pricing than an updated piece of software.