Supply-demand dynamic could change: Flandro

The reinsurance market must not take its current state for granted. A number of factors could alter the supply-demand dynamic and potentially rates as well, David Flandro, global head of analytics at JLT Re, told Baden-Baden Today.

“The first one is very clear, which is that there is a moderation in the inflow of third party capital,” Flandro said.

“It’s evident now in the nine month figures, you can see it in cat bond issuance, but it’s also evident when you look at other vehicles into which third party capital is flowing.

“That’s significant, because it means that some of the earlier estimates that portended a straight line increase in third party capital were probably wrong. It’s going to look more like a normal investment cycle. That’s number one and it’s an important supply side point.”

His second point relates to the effect of mergers & acquisitions (M&A) on the market. In September, he predicted that about 8 percent of all dedicated reinsurance capital had been affected by M&A over the last rolling year. “That is going to have an effect, at least at the margin,” he said.

The third factor is that risk-adjusted mid-year property-catastrophe reinsurance rates are getting closer to their late-1990s lows, Flandro said.

“That doesn’t mean that we can’t crash through those lows and the market can’t be irrational, but we are nevertheless getting close, and that is a factor. When people say the market is trying to find its feet or having difficulty quoting, those are three contextual factors you can point to on the supply side and the demand side.”

He added that another consideration is that the market is now approaching its fourth year of average to below average property-catastrophe insured losses. “This has been flattering reinsurers’ returns but it is nevertheless a superficial short-term trend,” he said.

“People are forgetting that this is not normal, that these are ‘noisy lows’ as we call them, in terms of natural catastrophe events. We will inevitably have a year when we have higher than average property-catastrophe numbers—it’s the law of averages.”

Finally, he said the market must also remember that the macroeconomic environment—which includes forward inflation expectations, interest rates, and economic growth—will, in the long run, have a greater effect than any one catastrophe loss year.

“In this market you need to see the big picture,” Flandro said.