Capital is pouring into the casualty reinsurance market from both traditional property catastrophe reinsurers looking to offset rate reductions in their own sphere, and now also from the capital markets, according to Andrew Newman, Global Head of Casualty at Willis Re. “This new capacity has resulted in a much wider choice of reinsurers for cedants, with increased supply also creating more competition in terms of coverage, structure and pricing,” he explained.
The fact that the capital markets have now entered the casualty markets at the risk level – an example of which is sidecar style operation Watford Re – is potentially game changing, according to Newman.
He selected two components affecting the casualty market, which he described as “potentially transformational. First, it confirms that new capital, in search of non-correlating returns, is willing and able to enter the Casualty space and participate at the risk level, just as it has in the Property catastrophe market.
“Second, it expressly offers clients a product that has a lower cost of capital, or an improved investment yield, or both, integrated into its pricing model. This at least conceptually represents a possible game changer in long tail lines.”
Newman did, however, point out that the new capital pouring in from both the traditional reinsurance and capital markets is as yet untested.
He said: “As a collective, new capital entering the Casualty space could be exciting, dynamic, cost-effective and valuable at an increasingly competitive point in the market cycle, and as such cannot and should not be ignored. At the same time all new entrants with whatever operating model should be scrutinized in the context of continuity given the significant time lag aspect of Casualty business.
He also pointed out that “questions around market selection cannot be readily answered in a vacuum and only serve to enhance the value to clients of expert advice in an increasingly complex and inter-connected market. On Casualty business, clients need thoughtful and informed support in understanding and measuring their Casualty risk in order to manage it to within an appropriate risk tolerance framework.
“These current changes in market dynamics warrant providing heightened guidance for clients, critical to help them achieve the optimal balance between proven and sustainable reinsurance supply without forfeiting the opportunity to mitigate risk at potentially much lower cost.”
Newman made his comments in a blog on WillisWire.
Source: Willis Re