“Reinsurance rates began to fall last year,” said Willis Re’s Chairman James Vickers in a telephone interview. The January renewals “saw more reductions, and this has continued in April.”
Vickers outlined three principle reasons: 1) 2013 was a benign year for natural catastrophes with relatively low losses. According to Swiss Re’s latest sigma report economic losses totaled $140 billion last year, down from $196 billion in 2012. As a result primary carriers have more capital and see less need for reinsurance.
2) Those primary carriers, especially the larger companies, are also “more sophisticated, employing more accurate models,” Vickers said. This also results in those companies perceiving that they have less reason to reinsure certain risks.
3) Alternative capital remains ready and willing to make investments in reinsurance risks, mainly collateralized reinsurance, cat bonds and sidecars, which reduces the role of traditional reinsurers.
A combination of these factors and others is changing the face of the reinsurance market, but so far it hasn’t greatly affected the bottom line. “Underwriting results in 2013 were excellent,” Vickers said; “mainly because of the low catastrophe losses.” There’s no guarantee, however that 2014 will be as benign as 2013.
He suggested that if it does continue, there will be less of a demand for reinsurers’ capital, which could lead companies to initiate share buybacks and/or increase dividends. It is also encouraging reinsurers to look beyond the saturated property catastrophe coverage market. “They’re being pushed towards tail risks,” said Vickers, which at least partially explains the renewed interest in the casualty side of reinsurance.
In a briefing note, published in February, Willis Re said: “There has been quite a bit of discussion over the effect that insurance-linked securities (ILS) and the euphemistically labelled “alternative capital” have had on the property catastrophe reinsurance market. Less has been said about what is happening in the casualty market, where several traditional reinsurance carriers, seeing both premium volume and margins compressed on property catastrophe accounts, have begun to re-deploy their capital more towards casualty.
“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.”
Branching out from property reinsurance, particularly in the U.S. market, is a definite change of direction. “Reinsurers are going into non-catastrophe and international markets,” Vickers said. “They’re writing business and accessing [reinsurance] buyers, who don’t need alternative capital.”
It’s a departure from traditional norms in more ways than one. The long tail nature of casualty liability coverage, and the difficulty of creating models for it, has meant that the reinsurance industry has shied away from entering the field in a big way. Vickers suggested that this might be changing, and that companies could make use of parametric triggers to try and gauge their exposures.
There’s been a similar reluctance to tap into international markets, which are frequently in developing countries, where the highly sophisticated models common to U.S. property cat are either primitive, or don’t even exist. Given the devastation that many of those countries experience year after year, with little or no insurance coverage, they could constitute a promising area for growth, possibly in conjunction with their governments.
Vickers cautioned, however, that “big investments” might be required, and that the need for highly specialized knowledge and experience is necessary. In most cases involving alternative capital the reinsurer retains a good portion of the risk, as they participate in the “sidecars” that are the principle investment vehicles used in these specialty markets.
The entire re/insurance industry, however, may eventually have to deal with a more threatening “elephant in the room” – the impact of climate change. Vickers said that the IPCC report, released yesterday, wouldn’t have an “immediate effect,” but he acknowledged that it is an “important document” that will lead “to a wider discussion of climate change.”
Both insurers and reinsurers have been active in climate change research. Munich Re, Swiss Re and several others have had entire departments dedicated to researching it for more than 15 years. Munich Re’s publication today outlines the remedial measures that have been taken to reduce the losses from floods.
The industry, however, with some exceptions, Catlin among others, seems reluctant to speculate – other than in a very general way – on the potential impact the ongoing changes will have for the world’s climate. Higher ocean temperatures are causing glaciers and sea ice to melt, raising sea levels. Changing weather patterns are causing more floods, stronger storms, droughts and wildfires, which can be expected to cause greater losses. Increasing awareness of these risks could lead to more demand for re/insurance, but the industry, quite correctly, doesn’t wish to be seen as causing undue alarm in order to increase sales. One way or another, however, the industry’s expertise will be called upon in years to come. After all managing risks is what the industry does.