1 November 2016 Insurance

Reinsurers hope for an unidentified event to harden rates

Many believe a big catastrophe loss would not be enough to move the market. Instead, only a combination of factors or something much more sinister and fundamental would be needed to effectively scare third party capital from investing and allow rates to harden.

Stephen Catlin, the founder of Catlin and now executive deputy chairman of XL Group, believes not only that the market will turn but also that there will be an overreaction when it does, although it will take a number of factors converging to make this happen. The longer the soft market lasts, the more pronounced it will be, he believes.

“Capital is fickle; investors can be like sheep. Re/insurance has been the flavour of the month for some time now but that will not last forever,” Catlin says. “Margins are thin and rates unsustainable. A big loss could change things or it could come down to cash flow. If cash flow turns negative, that could change things fast.

“If you have negative cash flow, reducing yields and changing investor sentiment all together we could see the market move quite suddenly.”

An unexpected big loss combined with the more general pressures on the industry could certainly cause a reaction, he believes. A very big cyber loss might do it, Catlin says.

Jed Rhoads, president and chief underwriting officer of Markel’s Global Reinsurance Division, agrees that it will take something significant to change the market—and he believes an insolvency would make people think twice about investing in the industry.

“Some reinsurers are perceived as too big to fail, but we’ve heard that before in the banking industry,” he says. He questions whether there is a series of events in this low interest rate environment, including concerns about foreign exchange, which could lead to change.

Charles Goldie, head of specialty lines at PartnerRe Global, agrees a big loss in itself is unlikely to be enough to turn the market because there is so much capital willing to move in. He too believes a fear factor would be enough to change the industry if the losses stemming from a big event were very different from those predicted by the risk modelling agencies.

“If a category 5 hurricane hits Miami, the risk modelling agencies predict a $100 million loss; if it comes in at $97 million, the market will not react,” he says.

“If a category 2 hurricane hits Miami with an anticipated loss of $30 million, which turns out to be close to $100 million, that is very different. The market will turn based on fear—not the size of the loss.”

This news story is just a snapshot of a wider issue.

To find out more about quantifying the fear factor to end the soft market, read the full story here.

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