There can be no guarantee of survival for those reinsurance capital providers hoping for price rises, in the wake of the recent major hurricane catastrophe loss events, according to James Nash of broker Guy Carpenter speaking in Baden-Baden.
The capital structure of the reinsurance industry has changed dramatically, with over $90 billion of ILS backed capacity from the capital markets vying for opportunities at every renewal season.
Despite all the discussion of trapped capital and collateral, the view remains that the capital markets can mobilise quickly, meaning that reinsurers hoping to influence pricing at the upcoming renewals, in search of larger price rises, may not be guaranteed of success.
Nash, President, International at reinsurance brokerage Guy Carpenter, said that capital is one of the themes that has fundamentally altered the reinsurance market dynamic, speaking yesterday in Baden-Baden, Germany at the annual reinsurance market meetings.
The capital structure of the industry is not the same as it was even ten years ago, and following the major catastrophe loss burden the market waits to see just how quickly the capital markets can raise and deploy new capacity post-event.
“If the theory plays out in practice, those participants waiting for the market to react with rationing and significantly higher prices will no longer be ensured survival,” Nash suggested.
Adding that, “For them to survive, they need to find new and better ways of doing business.”
Therein lies a problem for the industry, as for all the talk of transformation and disruption, much of the global reinsurance market remains mired in business practices hailing from decades earlier, with the core mode of operation and deployment of risk capacity still harking back to practices adopted in the distant past.
While at the same time other areas of the sector, particularly those influenced by insurance-linked securities (ILS), technology and the major global players, are rapidly moving towards new ways of accessing underwriting business, new ways of analysing or pricing risks, and new ways of attaching those risks to capital.
The pace of this change has been astonishing, in some quarters of the reinsurance market and now we find ourselves at a juncture where the industry is facing unprecedented tests against a backdrop of rapidly changing capital base and modes of deployment, which has led to the inevitable questions over sustainability.
But the fact remains that the pace and diversity of changes affecting reinsurance, “are disrupting the established order,” according to Nash.
There are constants though, as the underlying mandate of insurance and reinsurance, for enabling one party to lay off risk it cannot afford to bear to another, remains the same at its core.
Nash explained; “First, people and organisations will always want to protect their assets by laying off risk to others. Second, there will always be those with the capital willing to assume that risk.”
But around these two constants “everything is subject to change,” Nash said.
While the mandate of the industry remains the same at its core, the mode or method to achieve this risk transfer is changing dramatically and will continue to do so.
With the efficiency of risk capacity at the heart of these changes, either in the form of capital itself or the way it is managed and deployed, those looking to “manage capacity” in the hopes of stimulating faster price rises in the marketplace could find themselves at severe risk of disruption. When there are strategies that can raise capital and deploy it much more quickly and efficiently these days.
Nash concluded his comments, saying; “To manage disruption effectively and to grasp the opportunities it creates, we must look to identify, evaluate and package risk in a more intelligent manner.”
Also speaking at Baden-Baden, Luca Albertini, Chief Executive Officer of specialist ILS investment manager Leadenhall Capital Partners, said that capital flows have disrupted reinsurance, calling these flows “agents for change”.
ILS investors have responded well to the recent catastrophe events, prudently dealing with their claims in a fast and efficient manner and making progress on unlocking new capital, while dealing with capital lock-up at the same time. This should ensure ILS managers are able to provide continuity to their cedents at renewals, while acting in the best interests of their investors.
But Albertini explained that ILS capacity wants to be paid commensurate with the job it does and will not underwrite risks at any cost.
“The recent catastrophe events have demonstrated that ILS investors are in this space in a mature way and are here to stay; but not at any price. Investors need to see an acceptable long-term return for their investments, accepting losses, but seeking payback as well,” he explained.
The question is, if traditional reinsurers seek to manage the cycle in hope of higher rate rises, just how much ILS capacity could be deployed in their stead?
ILS investors want compensating appropriately, but their return hurdles remain lower than traditional reinsurer balance-sheets.
The markets dynamic at the January 1st 2018 renewal could see ILS capacity able to take a larger share than it has today, if its efficiency can be wielded to greatest effect while still getting paid sufficiently for the losses it has taken. As a result, we could see much more third-party capital put to work in reinsurance in 2018 and beyond.
Survival is only guaranteed for those that put their clients and investors or shareholders first, not those putting price rises above all else.