Back to basics in the land of El Dorado

The reinsurance industry faces a challenge re-establishing its relevance in the world and should focus on going back to basics when long-term relationships and trust mattered.

That is the view of Ingrid Carlou, chief executive of Patria Re. She reminisces that the industry two decades ago was based on trust and long-term relationships—things have changed for the worse, she said.

“When I came into the business some 20 years ago, reinsurance was described as a business between people, where trust and good faith were of the utmost importance, leaders were followed and fortunes were too,” she explained.

“Long-term association was the name of the game. Over that span of time, we have heard over and over that we have to go back to basics, that we must recover the fundamental principles. But all we have achieved is turning most lines of reinsurance into a commodity.”

She likened the industry of old to playing a game of chess. While some corners of the industry still operate in that way, much of it has changed beyond recognition, she said. “The vast majority of participants are now involved in a completely different game.”

Carlou said that one consequence of the changes in the industry has been the trend of fewer players controlling larger market shares. Over the last 20 years, the top 10 reinsurers have gone from a market share of about 35 percent to 56 percent; the top three brokers now control 80 percent of the market, she claimed.

In Latin America 20 years ago, she continued, 10 percent of total premium issued was in the hands of international interests. That has now increased to 50 percent. And many international groups have taken the position of reducing their security list to only five or six reinsurers, she notes, using more fully collateralised structures.

“Brokers are also wondering why they use such a large security list,” Carlou said. “Collateralised and securitised transactions have taken an important and new position in the market, taking up yet another share of what had been traditional insurance, a tendency that was initiated by bank insurance.

“This is milking the butter of the business away of the traditional carriers, and increasing the volatility of the sector.”

The change has been accelerated by the apparent support for such a dynamic by security committees, regulators and Solvency II.

“They seem convinced that the tendency is for the best and that a plural market should be replaced by a few relevant players.

“Yet this is happening in the midst of a global economy characterised by an excess of liquidity and capital looking for places to invest, and which is going nowhere fast. This situation is creating discomfort in economic blocks on the periphery who are clearly starting to question the people supposedly in charge.”

The land of mañana

In terms of the Latin American market specifically, Carlou believes the abundance of alternative capital is not having a direct effect but it is creating pressure on the market.

“As a consequence of the pressure it is creating on the top line of major reinsurers, prices are down, conditions are weakening and reinsurers are getting inventive in order to grab as much of the pizza as they can. But the pizza is not getting any bigger.” She added that more reinsurers are taking an interest in targeting the Latin American market as a result.

“As European and North American Pension funds have displaced traditional cat reinsurance in the US market, first tier and second tier reinsurers are being pushed towards emerging markets. At the same time, insurance companies are getting bigger and are increasing their retention capacities.

“All this means Latin America remains, as it has been for the last six centuries, the land of tomorrow; the land of El Dorado.”

This is justified in some ways, as she admits there is some potential for growth in the market. She said energy and infrastructure are two such lines while personal lines covering the emerging middle classes also hold potential if wealth distribution improves.

“I also believe there is important work outstanding in improving the efficiency of governments’ insurance purchasing. Better collaboration between the public and private sectors could create new opportunities and reduce frictional costs for all parties, which could in turn increase insurance penetration,” she said.

She feels that some of the root causes of the challenges the industry is facing are driven by the global economic system. Such issues are hitting the agenda of the BRIC economies increasingly and these could be a talking point in Monte Carlo this year.

“We should start considering more carefully the limits and lack of dynamism in the global system, something that the BRIC economies are discussing more and more, given the impact it is having on their economies,” she said.

“I fear Mexico’s rush into the Solvency II model falls into this chapter, an experience which is proving an important precedent worldwide. Regulation has been cited as today’s most important risk for the industry and yet the idol of globalisation and its gospel have taken the upper hand.”