12 September 2017 Insurance

Harvey and Irma will cause buyers to rethink strategies

As losses stemming from hurricanes Harvey and Irma become clearer in the coming weeks and months, buyers will be reevaluating the nature and value of some of the reinsurance structures they’re purchasing, Charles Goldie, CEO of worldwide specialty at PartnerRe, told Monte Carlo Today.

He believes that, driven partly by the proliferation of more third party capital, some buyers have bought more aggregate coverage and what he calls “one-shot deals”.

But many insurers needed more time to establish what their final losses will be from the first storm. They were then forced to make decisions about whether to buy more coverage or whether they were comfortable with their existing programmes, without really knowing where they stood.

“An interesting thing that will come out of Harvey and certainly Irma—regardless of the size of Irma—is that buyers will be thinking a little bit more about what they’ve purchased,” Goldie said.

“Whether or not Irma creates a big claim, it’s a wake-up call to the purchasers to say: ‘did I like that feeling of not knowing what my loss was or where my reinsurance was?’ Some may have had to go into the market when there’s a category 5 storm in the ocean and there’s warm water in the Gulf to purchase more coverage.”

A lot of third party capital offerings are collateralised and have just one limit. If a buyer exhausts that limit, it may need to find seek another coverage. This is in contrast with traditional reinsurers, where reinstatements are commonplace on contracts.

Goldie said that having been through this scenario, many buyers will look to their more traditional partners to find solutions that mean they do not end up in this position again. This may mean still leveraging third party capital, but in a different way, using a more holistic structure.

“Buyers will question whether they want to go through that process again. They will look to the market to come up with some solutions that allow them to access third party capital, perhaps in such a way they don’t feel that they have to buy an air-conditioner in the middle of summer.”

Goldie doesn’t believe single events will change the structure of the market, even if they end up being very significant.

“It’s a rate event, but it’s not structural change. Some people say third party capital will go away; I think it’s a mistake to think that way,” he said.

PartnerRe is now a privately-owned reinsurer after it was acquired by Italian investment company Exor in 2016. Goldie believes that ownership structure, away from the spotlight of being a publicly listed company posting quarterly earnings, allows PartnerRe to better take on volatility and think about business with a more long-term view.

“You look at all the events that have happened in the last two weeks, and the volatility that has created—our structure allows us to look at risk very differently,” he said.

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