Reinsurers Remain Optimistic In A Challenging Market: Industry Leaders

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Includes: GLRE, HVRRF, HVRRY, SSREF, SSREY, TPRE
by: Steve Evans

Despite the ongoing softening reinsurance market cycle that's testing the resolve of many companies, a recent slowdown in rate declines, rational behavior and continued innovation has left some industry leaders with a sense of optimism about the space.

Discussing the reinsurance marketplace at the annual PwC - S&P Global Bermuda Reinsurance conference in November, market experts and leaders emphasized the solid performance of the reinsurance market at a time when profitability is diminishing, and efficiency and discipline are a must.

Conference attendees heard that a recent slowdown in rate declines across the global reinsurance sector, a trend that has been helped by a reduction in the entry of third-party capital and increased underwriting discipline, and companies' focus on growth opportunities has given reason to feel more upbeat about the space.

"I think what I heard on Tuesday was an increased level of optimism driven by a number of factors including; that despite prolonged tough conditions the market as a whole has remained rational, that reinsurers continue to innovate and search out new opportunities to serve their clients, that investors continue to view the reinsurance asset classes as attractive, and, specifically for the traditional reinsurers, the continued value and importance of rated balance sheets to reinsurance buyers," said Matthew Britten, PwC Bermuda insurance partner.

An abundance of capacity from both traditional and alternative reinsurance sources, combined with a period of benign losses and low interest rates, has enabled reinsurance buyers to benefit from efficient reinsurance protection at more favorable terms and conditions.

But in response to persistent rate declines across the majority of business lines, and a desire among the industry to reach the bottom of the softening pricing cycle, has seen reinsurers and also insurance-linked securities (ILS) players push back, and decline business that is simply priced too low.

The discipline shown by both the traditional and alternative reinsurance players, and the diversifying range of risk transfer tools that the ILS and reinsurance space can offer, combined with a desire to expand into new regions and perils, is reason to feel some optimism about the industry, explained conference speakers.

"I do see green shoots of growth both for making the pie bigger and for each of us to be more efficient to attract more risk like cyber to our market," said Kevin O'Donnell, President and Chief Executive Officer (CEO), RenaissanceRe Holdings, Ltd.

Panel speakers underlined the potential for growth in areas such as U.S. mortgage risk, cyber, and with closing the global insurance protection gap (disparity between economic and insured losses post-event), areas that also present an opportunity for the ILS space to play a role, as we've discussed previously at Artemis.

Innovation and technology can help drive expansion into new business lines, as complexities with risks such as cyber and terrorism and a lack of understanding of certain exposures in emerging regions, and also other detrimental factors, currently limits the role both reinsurance and ILS can play.

Arthur Wightman, PwC Bermuda Leader and regional Insurance and Markets leader, commented; "While most reinsurers have embraced change to support incremental innovation, bigger breakthroughs are necessary to compete with the new technologies and business models that are disrupting the industry.

"Technology can radically eliminate waste and enhance underwriting; reinsurance can catalyse the reduction of the protection gap; disintermediation benefits customers and investors alike; strategic cost reduction must trump incremental savings; and diversity will improve returns and is close to being a silver bullet for innovation," he continued.

Overall, market CEOs expressed delight with how the Bermuda marketplace has performed during the testing times, and also noted that pricing movements appear to moving in the right direction, and that it may have already reached a bottom.

Looking to 2017, and perhaps unsurprisingly, CEOs emphasized that it will remain tough for market participants, but that overall, the sector is "very well poised for success."

Technology is advancing at a rapid pace, and is set to continue disrupting the reinsurance industry, while bringing ample opportunities for expansion into new risks and regions, and also heightened efficiency.

Innovation, and the utilization of a broad range of risk transfer tools from the traditional and alternative space to create solutions that address the needs of a changing risk landscape could be vital in navigating the softening landscape and expanding the scope of the sector, both now and in the future.

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