Appleby points out flaws in reinsurers’ dreams of hard market

Re/insurers who have been wishing for the return of the hard market should also be aware of the true ramifications of what they have been yearning for, according to Bermuda-based law firm Appleby.

Brad Adderley, partner in the corporate department in Bermuda, said that reinsurers should be careful what they wish for as a true hard market is usually triggered by substantial losses—losses that they rarely truly recoup even when rates rise.

“If you have a $100 million line and you lose $100 million, how much of an additional increase in premium will have to occur before you make back the money you lost? Do you in fact ever make back the money you lost?” he said.

“A real hard market occurs because you’ve made a real loss. Assuming you survive that, do you actually recover what you lost in those catastrophic events? The last hard market was about 10 years ago, as a direct consequence of hurricanes Katrina, Rita and Wilma.

“It would be interesting to take an analyst from a company that was in that hard market and ask ‘you lost a billion dollars—did the increase in premium cover that billion dollars?’. Unless you recover your losses, why do people want a hard market?”

An additional angle to that thesis was pointed out by Tim Faries, managing partner at Appleby. He said that another consequence of a very big loss is that the perception of demand for risk products is greater. He noted that in the course of the past 12 years there have been few high-profile events apart from Hurricane Sandy, meaning that perception has decreased.

Faries pointed out that the consumer side might also be a factor in the industry, forming a triangle.

“As consumer demand increases, prices go up; the market will respond even if everything that Brad was saying is accurate and true. What the optimal market level is, or should be, is something that will play out.”

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