Influx of capacity is a worry for pricing

Amer Ahmed, the chief executive officer of Allianz Re, says the effect the recent influx of alternative capacity is having on pricing will be a big issue and discussion point in Monte Carlo this year. He sees the issue with the perspective of both a buyer and seller of reinsurance and he says the impact it is having on pricing worries him.

“The constant capital inflow from investors into the reinsurance sector has changed the landscape considerably. The abundant availability of capacity in the market through these additional sources increases competition between investors and reinsurers and has a down- wards impact on pricing,” he said.

“Allianz Re is not only a provider but also a large buyer of reinsurance. Although the high capacity and pricing competition might seem favourable from a buying perspective, it bears the danger that certain risks get covered at inadequate rates. But it is in everybody’s interest that the overall insurance and reinsurance system remains stable and sustainable. This requires risk-adequate pricing—beyond the dynamics of supply and demand.”

Ahmed at Allianz says it is difficult to predict what sort of year it will be since you only need one big storm hitting a vulnerable area for losses to escalate quickly. He believes the industry will respond with flexibility and opportunism, as it has following previous losses, but with the capital simply entering the market in a different way.

“If there were to be substantial losses, we would expect sidecar capacity to enter the arena,” he says. “More opportunistic investors would seek to benefit from capital shortages and enter the market very quickly using sidecars as a vehicle.

“Many reinsurance companies have a sidecar on the shelf and are ready to offer their capacity if the market turns. It is also pretty straightforward to invest in an established fund these days and with listed funds now being offered it is reasonable to assume that these listed funds will be able to quickly create a new class with attractive risk-return characteristics for an opportunistic investor. The presence of an established ILS market with longer-term investor horizons probably dampens the cyclical effect of large events these days.”

Speaking ahead of the Rendez-Vous, he also maintains that the event will be as busy, vibrant and relevant as ever in 2013.

“For more than 50 years, Monte Carlo has been the place for discussions between players in our industry. Although there are also highly significant industry events in other regions, the Monte Carlo reinsurance conference has attendees from everywhere in the world,” he said.

The reason for that is geographical and time-related. The timing—early September— ideal because that’s when discussions for the anuary renewals start, with the first conversations between clients and reinsurers.

“The Monte Carlo Rendez-Vous has deeloped a brand over the years. This brand stands for probably the highest accumulation industry players in one place, providing condensed reinsurance business intelligence, topel thought leadership and first-hand market news, all in one week early in September. Plus there is the convenience of meeting, in a short time, within close reach, clients and reinsurers ho are otherwise spread around the globe. “The Rendez-Vous sets the stage for the einsurance renewals every year. Monte Carlo will absolutely remain relevant to the industry or the foreseeable future."