Home / Analysis / Renewed pessimism grips Monte Carlo
10 September 2018
Reinsurers and their insurance customers are gathering in the Mediterranean playground of Monaco for the annual Rendez-Vous de Septembre, but the mood is anything but playful.
Premium rates are depressingly low and rises have stalled, which means little has changed since the last gathering. Events over the past year suggest a return to business as usual is becoming an increasingly remote option.
Indeed, the time may have come for the industry to accept the harsh reality that a new business model is the prescription for survival.
Investors continue to flood the market with capital. The industry’s prolonged soft pricing cycle continues with no reprieve in sight. Profitability barely covers the cost of capital.
“The ‘new normal’ for reinsurers looks to be one where returns are less impressive and underwriting and fee income become larger contributors to profits,” AM Best says in a report released before the gathering, which started at the weekend.
“Better risk selection, greater diversification of product offerings, a wider geographic reach and conservative loss picks are keys to survival.
“Those factors, combined with the ability to take advantage of the new ‘cheaper’ capital coming into the market from investors that may not have the reinsurance and underwriting expertise, could lead to significant success for some.”
AM Best is maintaining its negative outlook on the reinsurance market. The ratings agency expects conditions to remain competitive in the near term.
Rates were widely expected to rise after last year’s record $US100 billion ($139 billion) of insured losses.
But that did not materialise in a market brimming with excess capacity from investors.
The disappointing June and January renewals underscore how much the industry has changed with the influx of cheaper capital from competing investor classes in search of yields.
“AM Best is concerned that property catastrophe pricing is somewhat at the mercy of the alternative capital market and is not as heavily influenced by the traditional reinsurance market as historically has been the case,” the ratings agency says.
“This is an important distinction with respect to current market dynamics.
“Any hope for near-term improvement in the market is directly correlated
to the current level of excess capacity in the overall market today.”
Hard as it may be, reinsurers probably need to accept alternative capital is here to stay.
Investors did not flee after last year’s catastrophes. In fact, contrary to expectations, their appetite for such risk investments increased.
“To the dismay of many observers, a series of catastrophe losses… did not dent the market’s capacity to fill orders at January 1 and the renewal season ended with only modest relief for pricing,” AM Best says.
“Nonetheless, optimism prevailed for a rebirth of the underwriting cycle for the June and July US catastrophe renewal. We now know how that ended, and while there was some improvement in pricing for loss-affected accounts, overall the mid-year renewal was a tremendous disappointment as any residual optimism fizzled.
“The reinsurance sector continues to skip along the bottom of the market with no clear trigger for a meaningful and widespread hardening.
“At the same time, the capital markets’ influence on the reinsurance sector continues to expand, replacing capacity lost [last year], and then some.”
Fitch Ratings has revised its outlook for the sector to stable from negative – but only because the reinsurers it rates are skewed to those with very strong business profiles and capital.
Otherwise, the sector is unlikely to hold on to the modest rate momentum seen so far this year.
Reinsurance broker Guy Carpenter believes pockets of new opportunities are there for the taking if the industry is brave enough to change and adapt its mindset.
Employing data-backed tools in areas such as sales and distribution, capital strategy and catastrophe exposure management will help tap into these opportunities.
“The outlook for the insurance market is one of increasing opportunity for companies that harness structural changes to create opportunities in new or existing markets,” VP David Priebe said.
"The availability of rich data sets and analytic solutions enables (re)insurers to carefully evaluate the myriad opportunities available and pursue a strategic approach to realising their goals for growth."
S&P Global Ratings is downbeat in its assessment of the sector.
The margin between modest price increases in recent renewal seasons and reinsurers’ cost of capital is too close for comfort, it says. Making matters worse, what momentum the market saw at the start of the year appears to have evaporated.
“Operating conditions for global reinsurance remain difficult despite modest renewal rate increases,” the ratings agency says. “The tide of cheaper alternative capital continues to compete with traditional players, which typically have a higher cost of capital.
“We think reinsurers’ profitability is likely barely to exceed the cost of capital [this year] and next year.”
Like AM Best, S&P believes the business model that has served the industry well is under pressure.
“Competing capital from pensions, endowments and other large institutional investors has entered the space in search of yield and the diversification benefits of adding a theoretically non-correlated asset class to their portfolios,” S&P says.
“The increase in alternative capital has been one of the biggest emerging risks to reinsurers’ business models and profitability over the past decade.”
It’s an odd thing that reinsurers’ stability has attracted the flow of alternative capital from investors, and now that is impacting on the sector’s ability to continue on as it traditionally has.
Hamstrung by its own attractiveness, reinsurance is going to have to change. The big question is, how will that impact on the wider insurance industry?
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