If you can’t beat new capital, join it: S&P Global
With more alternative capital coming into play, there is greater pressure on the reinsurance sector—but the key is to use it to their advantage, Ali Karakuyu, lead analyst, director, at S&P Global Ratings, told Baden-Baden Today.
Following the catastrophe losses of 2017, where there was a loss to alternative capital, Karakuyu said there is now clear evidence that it is here to stay.
“It has been traditionally useful in property-cat business. We are seeing alternative products crop up in casualty and life reinsurance, but the increased complexity and longer-tail of products in these sectors have yet to strike a chord with investors,” he said.
Karakuyu said that medium-sized player in particular have partnered with alternative capital arrangements—hence they are able to provide larger line sizes.
“Some players have benefited from the presence of alternative capital. As the saying goes, if you can’t beat them, join them.”
He noted that having more capacity means more pressure on pricing, but pairing with alternative capital can be one way of remaining relevant. Another reason that alternative capital is here to stay is that it provides a diversification benefit for hedge funds and pension funds, in terms of investment avenues, he said.
Speaking more generally on trends he sees, Karakuyu noted that S&P’s forecast for 2019 is that pricing increases achieved earlier in 2018 have faded.
While this year is not over, he suggested cat events so far in 2018 are earnings events.
In non-loss affected accounts, pricing was primarily flat, and even the renewals around cat-exposed Florida hadn’t seen an increase in pricing.
“We are seeing some lines of businesses that are really bleeding in terms of pricing,” said Karakuyu.
“For example, in terms of aviation, some companies have reduced their exposure substantially, and some are not renewing the business.”
He noted that the industry is barely meeting its cost of capital. For 2018 to 2019, the cost of capital is likely to be between 7 and 8 percent, and return on capital 6 and 8 percent.
“It’s just on the edge. If we see that the sector performs where the return on capital is below the cost of capital for a sustainable period, we could revise our outlook from stable to negative for the reinsurance sector,” he concluded.
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