21 October 2014 Insurance

Bloodied and bruised but change is now inevitable

The reinsurance market will increasingly feel bruised and bloodied as competition intensifies triggering consolidation and even potential insolvencies, Peter Mills, chief underwriting officer of Endurance, told Baden-Baden Today.

“The market will start to feel like I did after falling off my bike yesterday,” he joked. “It’s inevitable and part of the cycle. But it will trigger consolidation and there will also be companies that withdraw—possibly insurance-linked securities (ILS) funds that can’t deploy their aggregate.”

Mills, who is also head of global specialty reinsurance & Europe property/casualty reinsurance at Endurance, said conditions in the market are detrimental for all reinsurers and Endurance is no exception.

“It’s an extremely competitive environment,” Mills said. “The best way to fight these trends is to employ good people and try to stay on the positive side of the market performance. We want to be a market-leading reinsurer—leaders survive and carry on.”

Consolidation in the market is now inevitable, he said. But he also forecasts insolvencies.

“I believe history repeats itself and we’re in a similar cycle to that between 1997 and 2001. In that market, however, the large multinational reinsurance buyers retained less and ceded more. That meant when losses occurred, they hit reinsurers more than insurers,” he said.

“It’s different now. There’s a tremendous amount of capital available but the large multinationals and super-regional insurers are retaining more risk. People are talking about doomsday but I think the cycle will change faster than people think if we have a loss.”

He believes this for two reasons. The first is that, because buyers are retaining more, they will be hit harder by losses and will react quickly by hiking rates. The second is because he believes there are many second and third-tier reinsurers failing to deploy their capital. He believes that these two factors could trigger a rapid change in market conditions.

On the topic of the impact of alternative capital, Mills said it was almost a non-issue in Europe as most programmes are priced in a manner that doesn’t suit the ILS markets.

In the US however, he said, the major funds are now accepted and here to stay. They will continue to exert a great influence on the property-catastrophe market.

“There are two more rumoured billion dollar-plus start-ups. But there is too much capacity in the market anyway. I cannot comprehend what institutional investors see when they look at the reinsurance business and feel now is good time to invest,” Mills concluded.

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