Rate hikes may not be enough, say panel at Rendez-Vous roundtable

Rates are increasing, but perhaps not fast enough, was one of the main themes of a discussion by a panel of industry experts speaking at S&P Global Ratings’ Annual Reinsurance Roundtable at this year’s Monte Carlo Rendez-Vous.

The panel

Johannes Bender, director, S&P Global Ratings
Ivan Bokhmat, research analyst, Barclays
Christian Dunleavy, chief underwriting officer, Aspen Re
Markus Eugster, CEO, Korean Re Switzerland
Waleed Jabsheh, president, IGI.

While rates are increasing in the industry, the very nature of the pricing cycle has changed to one that is far more regionalised, and rate hikes in many areas are just keeping pace with increases in loss costs.

That was one of the takeaways of S&P Global Ratings’ Annual Reinsurance Roundtable at this year’s Monte Carlo Rendez-Vous. Hosted by Johannes Bender, director, S&P Global Ratings, a panel of experts at the session comprised: Ivan Bokhmat, research analyst, Barclays; Christian Dunleavy, chief underwriting officer, Aspen Re; Markus Eugster, CEO, Korean Re Switzerland; and Waleed Jabsheh, president, IGI.

Bender started the session saying that S&P remains positive on the industry’s prospects. Despite some headwinds, the rating agency has retained its stable outlook on the reinsurance industry based on robust capitalisation, sophisticated enterprise risk management practices, and still-rational underwriting continuing to underpin the stable outlook.

But he added: “We believe the sector is facing a lot of pressure from alternative capital and it remains a very competitive environment.”

He asked the audience for a show of hands on whether they expect rates to increase over the next year. The response seemed to indicate that the audience, at least, believe rates are hardening.

He asked the panellists to offer their perspective on rates. Bokhmat at Barclays highlighted that he sees a consensus among the management within reinsurers that the positive price momentum seen in 2019 will continue. This is reflected in the share prices of reinsurers, he said.

Dunleavy agreed that rates are increasing, but said more hikes are needed.

“There is a lot of talk of price increases, but they are only just keeping pace with loss experience as opposed to materialising into better margins. Further improvements are needed.

“Prices have been on a downward trajectory in too many segments for a long time and they remain below where they need to be.” He added that the industry was at the start of a structural change, which would take longer but would make increases more sustainable.

Pricing dynamic

Dunleavy made the case that the pricing dynamic in the industry has changed in the past decade, whereby rate changes are more localised to individual markets. He said this might be down to changes in the capital structure of the industry, which has muted the cycle.

“Rather than talk about the market as a whole, we should talk about price adequacy for each class of business—that is more meaningful than the blunt tool of looking at pricing globally,” he said.

He added that, for some time, the market had been relying on a lack of big catastrophe claims to bail out underpriced non-cat lines. “But every product should stand on its own in terms of pricing,” he said.

The industry must move away from the notion of payback, whereby rates increase substantially in the aftermath of a large loss—cedants thus paying retrospectively for part of their claims.

“Rather, we need to get paid for the cost of capital and the volatility we assume,” Dunleavy said.

Eugster said that Korean Re takes a long-term perspective on pricing but it is important that reinsurers have a clear understanding of when to walk away from business they feel is underpriced. Reinsurers must keep a close eye on the asset side of the balance sheet as a number of macro issues have the potential to hit both sides of the balance sheet.

He added that it is for individual reinsurers to decide which lines of business offer a suitable return and to develop relationships with cedants.

“There are still buckets of reinsurance that remain attractive—each company will have its own strategy on that. We launched in Europe because we see opportunities here. The patterns and dynamics in Europe are different from the US—there is cat exposure and secondary perils but we look at it risk by risk, country by country.”

Jabsheh at IGI agreed with other panellists that for many years rates on many lines of business had been unsustainable. He said he expected the momentum towards rate increases to continue in 2020, although much would depend on the level of cat losses in the rest of 2019.

Pricing has become more regionalised, he said.

“Many domestic markets are stronger and more independent than in the past,” he said. “Yes, we are operating in a global market, but companies will have different strategies within different territories.

“We are a global company, but we rely heavily on local talent and devise a strategy for each country. This business is not rocket science: the premiums we collect need to be more than the losses we pay out.”

Current storms

The panel discussed the implications of Hurricane Dorian for the industry. Bokhmat said that it should be well within re/insurers’ cat budgets for the year, but warned that there were several months of the hurricane season still to come.

Dunleavy had a warning: “If Dorian’s track had shifted and it had gone up the east coast of the US, you would not be looking at an earnings event but a potentially large capital event.

“That should serve as a reminder to everyone about the size of the potential losses from these events. It could have been very different; we should see it as a narrow escape.”

The panel discussed the health of reserves in the industry and the slowing of reserve releases. Bokhmat noted that certain cases had emerged where reserves had not been sufficient and that some warning signs could be observed on casualty business and in terms of creep of loss estimates post some cat events.

“But on the whole the industry seems to have reserved well and prudently,” he said.

Dunleavy agreed that the industry is pretty well reserved but it has “clearly moved into more of a pain phase”, he said. He noted that it has become apparent in recent years that some cat events can have a longer tail than people thought possible.

“Some cats are complex and so are some capital structures involving third party capital. The industry needs to be cautious on these things, but on the whole it is well reserved.”

Jabsheh added that he felt balance sheets were not as strong as they were 10 years ago and the levels of reserve releases have been slowing as a result. He said that rate increases will help with this but they must exceed loss trends.

“The momentum in pricing needs to continue to move the market to sustainable levels,” he said.

Alternative capital

The panel discussed the growing importance of alternative capital to the market and its reaction to several years of losses and other issues including trapped capital and loss creep on cat business.

Bokhmat said that one consequence has been that investors need to get more comfortable with risk models but added that cat bonds still offer a very attractive risk-adjusted return for investors as well as diversification while the barriers to entry in terms of the deployment of capital are low. This means that this form of capital is here to stay.

Dunleavy said he no longer refers to investment from the capital markets as alternative capital, rather he sees it as just another source of capital. “We do not see it as a threat, we use it ourselves and to solve problems for our clients.”

He added that he had observed a “flight to alignment” among investors from this space where investors are being more discerning about their strategies and want a better understanding of the risks and exposures—and how the risk models work.

The panel discussed the prospects of mergers and acquisitions (M&A) in the sector. Jabsheh said the hunger for growth and the lack of organic growth will continue to fuel consolidation.

The panellists agreed that technology could play an important role in how the industry might decrease its cost base, while it could also drive further M&A activity.