18 September 2013 News

New capacity could drive run-off

One consequence of overcapacity in the market is that capital will ultimately exit the industry. While this could happen in a variety of ways, there could be a big uptick in the number of businesses being put into run-off.

That is the view of Charles Goldie, head of specialty lines and a member of the global executive management of PartnerRe. He believes that with overcapitalisation it will become increasingly common to see both companies with unviable business models and units within larger reinsurers put into run-off.

“When you have overcapacity in the industry, it always ultimately gets given back in some form,” Goldie said. “Traditionally, it has been given to policyholders in the form of very soft rates.

“The industry is getting better at avoiding that but there remains the potential for self-delusion. I entered the industry in 1997 and I recall people saying they were ‘smarter this time’ but business pressures always allow the potential for delusion.”

Goldie notes that there have been more share buybacks in recent years and the industry could see limited mergers and acquisitions activity going forward – both mechanisms that could help reduce capital levels in the industry.

But an increasingly common way in which capital could leave the industry will be through run-off, he believes. Some companies may take this route as a strategic decision while other companies, especially if struggling with low valuations, could become acquisition targets for run-off firms.

“If a reinsurer hasn't already thought through their strategy and business model in a market with significant new alternative capital, it is probably already too late. I don't see that doing nothing is an option shareholders will tolerate.”

He notes that as rates on property-catastrophe business soften, some reinsurers have started to move into more specialty lines. But cedants in this sector are cautious of newcomers, he says, preferring to stick with their long term partners.

“They might give a small line to a new player here or there but they still recall 2002 when so many short-term players withdrew and they had gaps in their programmes as a result. They will dabble, but that is all.”

This dynamic could also lead to more run-off, he says. “If a reinsurer moves into the speciality space and fails to gain traction after a few years, either their board is going to close them or run-off will look appealing,” he says. “That is the other concern of cedants – they are not keen on having to persuade run-off companies to pay claims.”

He says he has noted interest from alternative capital in the specialty market. Although he believes this form of capital may participate one day, it will not be for some time. “The cat bond market took 20 years to develop. It will not take that long for this capacity to move into specialty but it will not be 20 months either.”

Already registered?

Login to your account

To request a FREE 2-week trial subscription, please signup.
NOTE - this can take up to 48hrs to be approved.

Two Weeks Free Trial

For multi-user price options, or to check if your company has an existing subscription that we can add you to for FREE, please email Elliot Field at efield@newtonmedia.co.uk or Adrian Tapping at atapping@newtonmedia.co.uk