10 September 2013 News

A buyers’ market as reinsurers face perfect storm

Reinsurers are facing another year of softening rates and little in the way of good news, as a trend that started in the catastrophe space post-2007 and in the non-catastrophe space post-2004, persists.

That is the circumspect view of Manfred Seitz, managing director of Berkshire Hathaway’s reinsurance division, as he considers the state of play for the reinsurance sector. He said that the sector has faced a protracted soft cycle for some years, although capital market capacity has helped to accelerate this softening.

“Further exacerbating the issue has been the convergence of traditional reinsurance and capital markets pricing,” said Seitz. Whereas ten or 15 years ago there was a noticeable difference in the pricing of capacity, it is now “close or equal”, with evident implications for traditional markets. While transactional costs remain on the alternative side, it is creating an increasingly competitive dynamic.

Seitz said it was difficult to envisage an event that would deter investor interest in the space. He said that it would need to be an event of significant magnitude to prompt a response from capital market investors. Thus far, however, there have been only a handful of alternative deals where investors have lost both coupon and principal, he said. Until this dynamic changes, it is hard to see a marked exit of capital markets capacity.

Seitz said that insurers today are enjoying something of a “buyers’ market”. They are finding themselves in a comfortable position in terms of both rates and increased optionality in their reinsurance options. The temptation would be to respond competitively, but Seitz said that in Berkshire Hathaway’s case, the reinsurer would only commit capacity to risks that are “fairly and attractively priced”.

Not that Berkshire Hathaway is short of capital. As Seitz made clear, the reinsurer is able to bring a significant amount of capacity to bear in a relatively short space of time. “But it is more about bringing capital to market during difficult circumstances, than pursuing market share,” he said. “To be a successful reinsurer you need to consider those business segments where you can be remunerated,” said Seitz, but in this current environment, doing so is “proving increasingly difficult”.

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