Beware under-priced business in whatever form
Diversification should not be regarded as a panacea by reinsurers and the industry as a whole must be wary of the consequences of under-pricing catastrophe risks however they are packaged.
That is the stark warning made by Tad Montross, chairman and CEO of General Re, speaking in the context of the influx of alternative capital that has entered the industry – something he says will be a big discussion point at the year’s Monte Carlo Rendez-Vous.
He says the different vehicles being used to cover these risks are sometimes distracting companies from the fact that some of this business is under-priced.
“The biggest talking point this year will be the capital markets and their feverish interest in the reinsurance business,” he said.
“Hedge funds, private equity and now the pension funds are all scrambling for a piece of the action aided by an army of bankers and lawyers looking to replace lost revenue from the mortgage backed security fiasco.
“But there are two underlying issues: the industry’s dependence on cat models and that diversification is not a panacea. If you put a portfolio of under-priced risks together and call it a bond or an insurance linked security, you still have a bunch of underpriced risks. Tail risk, leverage and liquidity are the lessons learned from the historical financial failures,” Montross said.
He said other big talking points at the event will be the continued consolidation within the brokerage industry and the longer term repercussions of this as well as the growing regulatory challenges.
He said that although delegates would likely discuss rates and terms and conditions in the market “one can’t and shouldn’t generalise about market rates. We look at every client and every transaction on its own merit”.
He said his objective at the Rendez-Vous is simply to meet with clients and prospects tobetter understand their challenges and needs“so we can be responsive in the upcoming renewals.”
And he said the company is in no hurry to make headlines, as long as it keeps doing what it does well.
“We will be making a big announcement in Monte Carlo: that we have no exit strategy,” he joked. “In all seriousness, we are committed to the reinsurance business. We don’t compete with our clients and we’ll be around to make good on the promises, the commitments we make. It may not make any headlines today but that’s fine with us.” .
