Are we really in a soft market?

The apparent soft market conditions do not reflect the positive underwriting results of reinsurers, according to Stuart Shipperlee, partner, Litmus Analysis.

Shipperlee said that despite the widespread belief that the industry is in the midst of a soft market, the results of most reinsurers are acceptable.

“What we’re hearing from many sources is that it’s a very profound soft market. It’s been soft for a considerable period of time and it appears to be continuing. Yet reported underwriting performance numbers and full year forecasts from the companies and the rating agencies are not at all bad,” he said.

“S&P, for example, published 2014 and 2015 forecasts in their rating reports. The 2014 numbers were almost exactly the same as 2012 and only marginally worse than 2013, which begs the question: ‘what’s going on’?”

Shipperlee said that one argument could be an increase in reserve releases.

“We might see more reserve releases, but that also happened in 2011, 2012 and 2013, so the comparison between those years shouldn’t be overly influenced by positive reserve releases,” he said.

“Another possibility is that the headline softening is far worse than the reality. People are writing proportional layers and primary business – even though we think of them as reinsurers – and those markets are less impacted.”

However, Shipperlee aso believes it is possible that underwriters are being optimistic about the business that they’re writing.

“What we’re seeing can only be explained as a rose-tinted view of reserving. In other words, underwriters are being overly optimistic about how the business they’re writing is going to play out,” he said.

And despite risk models being much more advanced than they used to be, which Shipperlee says should ultimately flag up any issues, he admits uncertainty plays a large part in the process.

“This is not a perfect science,” he said. “When you have a lot of uncertainty, there is a lot of potential to form different opinions about what will happen.”

He also spoke of an apparent disconnect between the rating agencies. Three of the four have a negative rating outlook on the reinsurance industry.

“Typically, this means that over different time periods, they expect more downgrades than upgrades. However, we haven’t seen a single significant reinsurance carrier downgraded this year,” he said.