14 September 2016 Insurance

A different type of cycle for a changing industry

In attendance:

Jim Bichard, partner, PwC

David Flandro, global head of analytics, JLT Re

Matthew Mosher, chief operating officer, rating services, AM Best

Eric Paire, head of global partners and strategic development, Guy Carpenter Adam Szakmary, chief executive, Blue Capital

Louis Tucker, group director, Barbican

The question of whether the growing diversity of capital entering the risk transfer industry will ultimately end its traditionally cyclical nature was debated by senior industry executives at the annual Intelligent Insurer roundtable in Monte Carlo.

That was the overarching conclusion of a panel of risk transfer experts speaking at the annual Intelligent Insurer roundtable in Monte Carlo on September 13, which examined the nature of cycles in the industry and posed the question of whether they are dead.

Eric Paire, head of global partners and strategic development, Guy Carpenter, said that a lot of capital had entered the industry and this had the potential to balance out the peaks and troughs. He also said the dynamics driving that were far more complex.

There were many other factors that could move the market, he said, and a major reserving crisis, for example, could have the potential to be far more serious than a big catastrophe loss.

David Flandro, global head of analytics, JLT Re, agreed that a reserving crisis could be enough to move the market, as history had shown. He pointed out that such a problem puts the strength of reinsurers’ balance sheets into doubt and quickly changes everyone’s view on capital levels.

He also said that the view that the industry cycle was dead was too extreme. He agreed that it may dampen any flattening but said cycles in the industry are driven by a lot more than simply big losses and capital entering or exiting the industry on the back of rates.

Flandro explained that a convergence of factors could very well trigger another hard market. He said a crisis on the asset side of the business or a big scare around under-reserving could send shock waves through the market, especially if combined with inflation, which would dilute reserves further.

“Third party capital might mute the cycle but previous hard markets have always been triggered by a number of factors, and it is impossible to say that would not occur again,” he said.

Matthew Mosher, chief operating officer, rating services, AM Best, stressed that the belief some in the industry have that third party capital might disappear in the aftermath of a big loss is probably misplaced. He agreed that it might dampen a change in the market but agreed that other factors would help determine how the market might move.

Louis Tucker, group director, Barbican, stressed that many investors in the industry using third party capital are extremely sophisticated and would be unlikely to leave the industry in the aftermath of a loss if rates increased. He said a cycle would still occur but it would be less pronounced.

Jim Bichard, partner, PwC, highlighted the issue of risk models and how they have improved the industry’s understanding of risk and its associated price. But he also stated that models can only do so much, and the human factor still plays a big part in the industry.

“Models are very sophisticated but people don’t carry them in their briefcases,” he said. “They inform the discussions but at the end of the day people are trading and it comes down to human interaction.” This, he said, meant that cycles were still possible despite the existence of better modelled data.

Adam Szakmary, chief executive, Blue Capital, added that the industry definitely has a more technical understanding of risk now and he believes property-cat rates have bottomed out. But he agreed that the end price remains a decision being made by investors or reinsurers, and is not informed only by risk models.

“I still believe in the cycle—in the aftermath of a loss, buyers will see which capital is sticky and we will see rate increases come through. But what shape that looks like and how long it will last I don’t know,” Szakmary said.

Fear factors

All the panellists agreed that a big loss in its own right may not cause the market to turn, whereas an unexpected loss might. They agreed that a fear factor around the industry having potential exposures it had not previously considered could be enough to prompt enough capital to leave that rates would increase.

Another factor could be that if the wider investment markets improve, third party capital would be less inclined to play in the re/insurance industry. But they all also agreed that a confluence of factors would be most likely to move the market in a significant way.

Coming back to the potential impact of a reserving crisis on the casualty side of the business, the panellists debated the fact that third party capital would be less able to take advantage of hardening rates in this sector of the industry because its long-tail nature makes it less conducive to this form of capital.

As such, different cycles could emerge within the industry, said Mosher.

“The money will not flow as easily into that part of the market and two cycles could emerge,” he said.

Paire noted that regional cycles or very market-specific cycles already exist in the industry and often the idea of an industry-wide cycle was too simplistic and not reflective of the reality of the industry.

The panellists also debated the potential for the industry to grow by exploring new markets and risks. They agreed that this came with risks, which could also play a part in determining the cyclical nature of the industry going forward.

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