12 September 2016 News

The longer the soft market continues, the greater the overreaction will be: Catlin

In contrast to those who believe a soft market is the “new norm” for reinsurance and that the days of a marked cycle are over, Stephen Catlin, the founder of Catlin and now executive deputy chairman of XL Group, believes an overreaction in pricing will eventually occur.

“Capital is fickle; investors can be like sheep. Re/insurance has been the flavour of the month for some time now but that will not last forever,” he told Monte Carlo Today. “If the industry is simply not making money, things will change. Investors will live with no capital growth but they will not live with negative capital growth.”

Catlin believes that a combination of factors will eventually converge to move the market—but the change, when it comes, could be a knee-jerk reaction. The longer the soft market lasts, the more pronounced it will be, he believes.

“Margins are thin and rates unsustainable. A big loss could change things or it could come down to cash flow. If cash flow turns negative, that could change things fast,” he said.

“If you have negative cash flow, reducing yields and changing investor sentiment all together we could see the market move quite suddenly.”

He compares the current market to what happened in 2000/2001 when a combination of factors including inadequate reserving on casualty business meant the market was already hardening before the terrorist attacks of September 11, 2001.

“Then 9/11 happened and that was a loss the industry had not expected or considered before. There were so many classes of business correlated and people reacted,” he said. “I believe the longer this soft market lasts, the more likely it is that we will see that sort of scenario again.”

An unexpected big loss combined with the more general pressures on the industry could certainly cause a reaction, he said—a very big cyber loss might do it. He is also clear that the industry cannot continue with rates at these levels for much longer.

“We know things are not sustainable. Reserves in the industry are as thin as they have been for a long time. There is just no room for manoeuvre. People were hoping that interest rates would increase but that still looks a long way off. The fact is that makes the industry very attractive to investors and they have more patience as a result, but this situation cannot go on indefinitely.”

Catlin is chairman of the steering committee of the Insurance Development Forum (IDF), the body formed to help apply insurers’ risk expertise to the insurance-related challenges and opportunities presented by the UN Sustainable Development Goals, the Paris Climate Agreement and the Sendai Framework for Disaster Risk Reduction.

The group has its first board meeting this month, at which its priorities will be agreed. Catlin believes the education of governments around their understanding of the insurance industry should be one of the group’s overarching objectives. He is also determined that the IDF achieves tangible results and does not simply become a talking shop.

“It has become very clear to me in recent months that the situation is worse than I feared in terms of just how little most governments understand the industry,” he said. “All the evidence shows that, in the aftermath of a catastrophe, high levels of insurance mean an economy recovers faster, human deprivation is reduced and the final bill to the tax payer is lower. What government would not want those things?”

He said that the global insurance industry has never lobbied effectively, offering one voice and one message to governments. This is how he believes the IDF can make a difference. “Too many firms have tried to paddle their own canoe on this but we are far better united with a commonality of purpose. If we are successful it will benefit the industry by generating growth and it will also benefit society as a whole. We now need to deliver.”

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