Pressure on to diversify
Complexity will become the new reality for carriers if they are to prosper in the new look reinsurance marketplace, according to AM Best.
Returns will be “less impressive” and underwriting skills will drive profits leading to “more conservative risk selection, more diversification of product offerings, a wider geographic reach and conservative loss picks”.
That’s the opinion of AM Best vice president Robert DeRose, who added that the winners in the new environment will shun unprofitable lines and move into more difficult to price business streams, and warned “not everyone will be a winner”.
“The winners will be able to walk away from bad business; will have the capital and expertise to write new, more complex lines of business; will provide the products and services that clients want in a global economy; will be able to manage the inflow of third party capital to their own benefit and will be able to participate in the new era of consolidation without being left out of the game,” he said.
One consequence of this drive to mine new markets will be further consolidation.
“Mergers and acquisitions (M&A) deals are expected to continue in 2015 as certain companies realise the need to create a more diversified and global book of business. As the market continues to remain challenging and competition intensifies, companies are under pressure to deliver underwriting profits. So the need for a wider footprint and broader scale becomes fundamental for companies competing in the current market,” DeRose said.
He added that reinsurers will continue to face pressure from third party capital as their traditional structure comes under increased pressure.
“The relative absence of any market-changing catastrophic loss events over the past few years continues to damp down reinsurance pricing. Combined with the prolonged low interest rate environment, this makes the potential efficiencies offered within the insurance-linked securities space look all the more attractive.
“Reinsurers will contend with depressed investment returns, pricing pressures and the increased presence of pension funds and hedge funds that are looking to diversify their portfolios.”
That scenario has driven the influx of third party capital which saw cat bond issuance last year total $8.8 billion, a 15 percent growth over the previous year. Thus far in 2015, $6 billion in cat bonds have been issued and this shows no signs of slowing.
It appears that initiatives spawned by re/insurers have sown the seeds of some of their own capital destruction.
“The increased reliability of risk models, diversification of benefits and the potential returns continue to be a compelling option for investors with third party capital to deploy,” DeRose said.
“However, investors appear to recognise that the pricing fundamentals in property cat are not as attractive as they once were and appear to be more cautious in providing new capital to the market.
“The alternative capacity has been focused on property-catastrophe and largely it’s been in the US, and to some degree in Asia. Those specialist reinsurers that focused on those products and geographies are feeling the greatest pressure to diversify.”
