The CEO of insurance giant Zurich hopes that 2019 will see a more balanced marketplace, in terms of capitalisation, resulting in less inflows of new capacity that could dampen pricing.
Mario Greco was speaking to CNBC News at the World Economic Forum in Davos, Switzerland, when the subject of economic monetary policy came up and how the liquidity provided by central bankers could be affecting pricing in insurance and reinsurance markets.
Of course this is a perennial topic of discussion among industry CEO’s and interviewers, whether recent economic policy is partly to blame for driving capital market investor interest in allocating capital into reinsurance risks.
Whether quantitative easing made more capital available and drove up liquidity in certain asset classes is less of a moot point.
Without a doubt QE did make capital flow more readily in many parts of the financial markets.
But whether it drove interest from investors in investing in insurance-linked securities (ILS) and reinsurance-linked assets is even more moot, as the asset class had to be attractive and stand-up in its own right in order to attract the inflows that it received.
Greco appears ready to accept QE as a driving force behind capital inflows into reinsurance.
He said to the interviewer, “Last year, rates have been too low, because of this flow of capital and liquidity in to the market.”
“After the catastrophes in 17 we expected much stronger price increases and they were calmed down by the liquidity provided to the market,” he explained.
Greco believes that capital flows across the broader financial sector may tell a tale of how re/insurance will be affected by capital in 2019.
“We think that this year the prices will move up. The fact that capital is flowing out of many markets, we see that as a positive, as a sign that markets are re-establishing their balance,” he said.
He also said that the catastrophes of the fourth-quarter of 2018 are likely to drive, “a positive impact on pricing in 2019.”
Let’s be clear. It is not quantitative easing that drove capital into reinsurance in early 2018, dampening rates at the renewals despite the catastrophes of the prior year.
It was the appreciation for the ILS asset class, the hopes of higher returns after losses, and the chance to reap greater profits, that encouraged capital inflows into ILS funds and collateralized reinsurance vehicles.
Of course this didn’t always manifest and rates ticked along almost flat, as many experienced heads in the market had expected.
The recent January 2019 renewals saw cooler heads and less capital raising, resulting in a less well-capitalised ILS market, but still nothing to really write home about in terms of rate increases.
For Greco’s Zurich, the best chances of higher rates will be in catastrophe loss affected zones as 2019 progresses, or in enforcing and helping the rest of the market to understand the need for risk commensurate rates.
Even then, the insurer may find rates are still dampened by capital liquidity and inflows, but these won’t be QE driven we believe.
Rather they will be driven by the appetite of investors to access the returns of an asset class that still exhibits little correlation to broader financial metrics.
For the main attractions to ILS investing are undiminished by the losses of the last two years. Still the asset class promises an alternative source of returns that are largely divorced from the performance of broader financial markets.
As an alternative and a diversifier ILS continues to offer significant value to institutional investors and they continue to seek out new opportunities within the sector.
With new start-up ventures, expanding ways to access risk and new partnerships being formed, the ILS market is likely to continue to influence the ability of major players like Zurich to secure the rate increases they desire.
But at the same time it offers the same players an efficient source of protection, capacity to augment their own underwriting and a robust opportunity to earn income from underwriting on behalf of investors.
Even if QE activities ended immediately, the ILS market is still likely to grow and more capital flow into insurance and reinsurance markets than major traditional companies would like to see.
In fact it could even accelerate, if the mechanisms to match risk and capital become increasingly efficient thanks to technology and the market continues to try to lower its ultimate cost-of-capital.