The long awaited end of the reinsurance pricing cycle may be obtainable, but is that necessarily good news?
In his keynote speech at the PricewaterhouseCoopers breakfast briefing at the Reinsurance Rendezvous Martin Sullivan, deputy chairman of Willis Group and CEO of Willis Global Solutions, made the point that “reinsurers’ total available capital may no longer be the only driver of reinsurance market softening or hardening.”
He noted that the overall soft reinsurance market that has persisted since 2004 could become the norm for the foreseeable future, with hardening occurring along geographical and business lines rather than across the broader market.
Sullivan explained that the previous three hard markets have been driven by a reduction of industry capitalization and short-term difficulty in rebuilding and accessing new capital.
Today, these historic across-the-board hard market cycles are unlikely to be replicated, he said, due to advances in actuarial and natural catastrophe modeling techniques attracting longer-term capital market investors.
He warned, however, that if reinsurers face a perfect storm of, for example, inflation and sovereign debt default, “all bets are off” and a global hard market would likely ensue. “Barring this type of financial Armageddon, the current levels of over capitalization may be reduced by losses and poor investment returns, but that should not return us to the bouts of capital starvation that drove market behavior in some of the earlier hard markets.”
As a result of what may be an historic change, Sullivan indicated that both insurers and reinsurers will have to adjust to a “new reality in which outsized underwriting returns will only be available on a localized basis, and even then possibly only for short durations.” Regulators, for their part, may focus on the possibility that the convergence of modeling techniques could lead to systemic risk.
Sullivan concluded: “While underwriting excellence remains key, more sustainable competitive advantages need to be developed by the reinsurance industry through operational excellence and reduction of costs.”
David Law, global insurance leader at PwC, said that the industry needs to recognize that the drivers contributing to a hard market are changing.
“Simply managing the cycle will no longer produce adequate returns for investors or provide meaningful value for customers,” said Law. “This evolving landscape should be a catalyst for the industry to reinvent itself and demonstrate the value of alternative risk-management solutions. Reinsurers need sustainable strategies, built on differentiation and stakeholder needs, to help the sector demonstrate its value potential to the capital markets.
“The winners are likely to be those companies that are agile and innovative, have embedded risk-management practices within their business and are obtaining maximum value from diversification.”
Source: Willis Group Holdings