The President of global reinsurance broker Willis Re warns reinsurers today that in order to survive the challenges posed by a highly capitalised market, competition from alternative capital and softening rates, they need to stay relevant and diversify for the right reasons.
With the global reinsurance market under pressure from the influence of capital markets products and alternative reinsurance capital from institutional investors, reinsurers have been forced to react to maintain profits in the challenging market environment.
Traditional reinsurers must stay relevant, but at the same time must remain mindful about what areas of the reinsurance market they diversify into, according to Paddy Jago, President of Willis Re.
Jago says that the reinsurance market is currently in the largest state of flux that he has seen in his 35 year career in the industry.
“So what do you need to be to survive? Well, if there’s one thing I’d advise all reinsurers to be at the moment, it is to remain relevant,” said Jago.
“To be relevant, your number one priority is to have a high degree of expertise. That matters above all else. Secondly, I think you have to be of a certain size. Lastly, you need to have relationships in place in the reinsurance market. These three things will dictate whether you remain meaningful in the reinsurance business in the future,” he continued.
This structural change, caused by the convergence of factors such as highly capitalised traditional reinsurers, low levels of catastrophe losses and increasing inflows of alternative capital, have pushed traditional reinsurers to look for diversifying opportunities in lines of business where the capital environment has not affected rate as significantly.
Diversification needs to be undertaken with caution, warns Jago, reinsurers need to be careful to ensure they are not chasing growth for growths sake in areas of the reinsurance market where their expertise may be limited.
“What concerns me is that you’ll have markets going into areas where they have no idea what they’re doing. For me, the broker, maybe that will be a pot of gold, because I’ll have a market who is unable to rate the risk commensurate with the exposure. But if they don’t understand what they’re doing they could end up exacerbating their problems, and instead of growing their top line – which is the reason they’re entering new markets in the first place, they could end up exploding their bottom line,” he added.
Jago’s comments are extremely relevant for the smaller to mid-tier reinsurer which is finding itself pressured in the property catastrophe reinsurance market and increasingly pressured elsewhere, such as casualty reinsurance lines, as well. With the influence of alternative reinsurance capital now clear in lines such as casualty, specialty and possibly set to broaden further, diligence and an unwavering focus on what you do well is possibly the best course.
More reading:
– Capital creates competition in casualty reinsurance, where next?
– Alternative reinsurance capital more disciplined than you think
– For reinsurers growth via alternative capital may be most attractive
– Declining reinsurance prices a credit negative for reinsurers: Moody’s
– Reinsurers stable, third-party capital could change the game: A.M. Best
– Alternative reinsurance capital; friend or foe? Perhaps compatriot?
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