Third party capital likely to dampen pricing peaks: Axis CEO Benchimol
The proliferation of sidecars, re/insurance funds and other instruments that enable capital markets investors to easily invest in risk transfer will dampen potential peaks in pricing following big losses—but that does not mean that prices will not rise.
That is the view of Albert Benchimol, chief executive of Axis Capital, who was speaking to Monte Carlo Today as Hurricane Irma approached Florida. He stressed that while the abundance of such vehicles in the industry will affect the dynamic around pricing, they will not change the fundamental principles behind the industry’s cyclical nature.
“Pricing follows losses in reinsurance; in a period of low claims levels, prices fall and when claims increase, they rise,” he said. “The pace and extent to which prices change is a function of the amount of capital in the industry. If capital is low, they will rise quickly and decrease slowly as companies recover balance sheet strength. If the industry is capital rich, prices will be slower to rise and faster to decrease again.”
He stressed that losses stemming from this hurricane season will add to growing claims levels in other areas of the industry including areas of the casualty side such as D&O. On this basis, he expects that prices should increase; the extent and timing of how that happens that remain to be seen and could depend on investors’ appetite to reinvest in the industry using these vehicles.
“The fact is the industry has many of these vehicles already in place to write business,” Benchimol said. “Rather than form new companies, as used to be the case, that is the quickest and most efficient way for capital to enter the industry now.
“It may have the effect of potentially shaving the peaks from pricing. The spikes in rates we saw in 1993 or 2002 are unlikely to be repeated but it should not mean that capital entering the industry will not expect an adequate return.”
Axis Capital has itself embraced third party capital in several ways in recent years. In 2016 it partnered with investment group Blackstone to form total return reinsurer Harrington Re, raising $600 million in the process. Meanwhile, Axis Re Ventures manages capital for third party investors in a number of ways including through sidecars, insurance-linked securities (ILS) and other strategic initiatives.
Stay calm and help clients
Asked how he prepares for potentially sizable losses as a hurricane approaches the US, Benchimol said that his first rule is to stay calm, as experience shows that storms can change path quickly. Once heavy losses are confirmed, he said that is his company’s “chance to shine” in the way it responds and helps its clients.
“We want to ensure we have a good handle on the exposure of our clients so we can react very quickly to help them,” he said.
“Especially on the reinsurance side, if it is clear that losses are very high we may send a client the cheque before they have submitted a claim. We appreciate that people are suffering in the aftermath of such an event and that is what we are here to do. That is what differentiates us in the eyes of our clients.”
He said Axis did this in the aftermath of losses stemming from the Fort McMurray wildfires in Canada in 2016. “On the reinsurance side, if we can see that they have blown through their reinsurance programme, why wait? It is the right thing to do and it certainly earns loyalty,” he said.
Benchimol added that he knows investors in the company are prepared for such losses. “If you cannot handle the volatility, you should not invest in the re/insurance business,” he said.
“That is why the investor base in re/insurance is relatively narrow. But that is not a problem for us. The best companies are built for this.”
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