Senior Bermuda-based reinsurance executives have said that they expect challenging times ahead and a soft reinsurance market in 2014, as recent trends result in further reductions in reinsurance rates and slipping terms and conditions.
The executives were speaking at a recent client event held by global assurance, tax, advisory and transactions firm EY (Ernst & Young) in Bermuda. This was the first panel, titled ‘The Big Picture: The (Re)Insurance Industry in 2014 and Beyond’, in the annual EY Global Insurance Outlook.
The outlook is not all bad though, said the participants, with innovation and increased reinsurance demand in emerging and developed markets helping to make the outlook more rosy longer-term. But challenging times are ahead when underwriting diligence, the ability to innovate and a willingness to be adaptable are going to be key traits among the successful reinsurers.
Bill Pollett, President and CEO of Blue Capital Management Ltd., and Matthew Wilken, President of Argo Re, both agreed that 2014 would see a softening reinsurance market with further pressure on rates and terms and conditions at reinsurance renewals.
“The rates will fall, that is a given. All in all there will be pressure on the rates and the terms and conditions are slipping. The reality is that we are in a softening market,” commented Mr. Wilken.
Pollett added; “We are heading into a market cycle where underwriters need to have the courage to say ‘no’ and walk away from business. There are some challenging times ahead.”
Additionally the participants said that they expect to see an increasingly tough regulatory environment and there is an expectation that interest rates will rise creating further complication for insurers and reinsurers.
“It is a tough time. It is time to be very careful and very disciplined, but to also be in a position to react opportunistically,” said Mr. Pollett.
However opportunities abound for those willing to innovate and who look to tap into under-reinsured risks and new or emerging markets.
Pollett explained; “Some of the products we have been offering over the last decade have been same old, same old. Some smart folks have come in looking for different ways to provide solutions which is exciting.”
“There is a lot of innovation and a lot of opportunity for innovation. For example, only around twelve percent of households in California have insurance that protects them from earthquake damage but significantly more have mortgages. There’s a need for more cost effective risk transfer solutions on a massive scale.”
Wilken said that insurable exposures continue to rise around the world, leading to opportunities for reinsurers; “People continue to build houses in more vulnerable parts of the world than ever before. I think more reinsurance should be bought to protect companies.”
At the same time risk is growing, it is now a reality that there is an increasing frequency and severity of events, coupled with a growing population. “There is opportunity to expand,” he said. “There are huge tracts of the world that have very low insurance penetration.”
Wilken added: “We have a tendency to focus on the developed nations, but the tragic events in the Philippines recently show how little insurance penetration exists there.”
“There must be an opportunity to spread the world’s wealth and capital and be able to protect those people who need it most.
“Insurance is about spreading the loss of the few amongst the many and sometimes we get so wrapped up on returns on capital and making money, which is absolutely essential you have to make money, we sometimes forget that there is a social element to make sure people protect themselves better.”
This continued the theme that has been written about at length here on Artemis, that reinsurers need to lead the way on providing risk transfer for the world’s risks and that those reinsurers who seek to tap into these emerging economies and under-insured risks can profit. However innovation is key, as is a willingness to be capital agnostic and to harness new structures from the ILS and alternative reinsurance capital market in order to be as efficient and transparent as possible.
So the possibility of a reinsurance market which continues to soften should not be seen as all bad just so long as you are willing to remain diligent in terms of the underwriting you currently do and are willing to look outside the traditional for new and emerging opportunities.