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Insights from the Property/Casualty Industry Forum
‘Alternative’ insurance market players are here to stay
How is it possible that despite paying out tens of billions of dollars in catastrophe claims from multiple hurricanes, wildfires, earthquakes, and other natural disasters last year, most property insurers could only manage to command relatively modest rate hikes for their January 1 renewals?
January 31, 2018
A blog post by Sam Friedman, Insurance research leader, Deloitte Services LP.
While noting that 2017 may have produced one of the worst underwriting losses for insurers in years, speakers at the recent Property/Casualty Joint Industry Forum recounted how low-to-mid single-digit premium increases were the rule rather than the exception for most policyholders in disaster-prone areas, while the rest of the market generally saw few to no hikes (and some even enjoyed cuts) in their rates. Reinsurers, in particular, it was pointed out, had anticipated much bigger boosts to their top lines than what actually materialized.
Insurers and analysts discussing the state of the market on panels at the Forum and swapping war stories during the breaks kept emphasizing how overcapitalized the industry remains, so much so that 2017 disaster losses estimated at as much as $130 billion are not likely to make much of a dent in record surplus levels. Why is that?
It all comes down to the simple yet potent law of supply and demand. A big part of the equation is that so-called “alternative” market players continue to pour additional capacity into property-catastrophe insurance, thereby undermining pricing leverage and profitability for legacy carriers. Take reinsurance, where alternative capital was up 9 percent to $82 billion in 2017, accounting for nearly one-fifth of overall capacity, according to an analysis by Guy Carpenter & Company, completed in conjunction with A.M. Best Company.1 And there’s no indication those backing insurance-linked securities and new reinsurance entities are going anywhere anytime soon.
Four years ago, reporting from this very Forum, I cited a sense of alarm and dread being expressed by more traditional insurers when these disruptors started entering the market in force. Back then, there was plenty of dismissive talk about how “naïve” capital from hedge funds, private equity firms, pension funds, and individual investors would likely flee the insurance space at the first real sign of trouble—that
One reinsurance executive at the Forum told me that because disasters tend to tie up capital in catastrophe bonds until claims are all resolved, the sheer number and severity of 2017’s events were expected to at least slow recapitalization of the securitization market, as investors waited to see what they actually lost before determining how much they wanted to reinvest—or perhaps even call it a day. But, if anything, the opposite seems to be occurring. Some “alternative” players may be reinvesting because they anticipate regaining their losses through rising cat bond yields. Many also probably figure the odds have shifted in their favor, betting we won’t have two horrific years like 2017 in a row.
Capital markets players becoming mainstream capacity providers
At this year’s Forum, run by the Insurance Information Institute and supported by a host of industry associations, most speakers acknowledged that insurers and reinsurers may have underestimated the staying power of their new rivals, predicting that much of the alternative capacity in play today is probably here to stay. One major CEO went so far as to observe that at this point, “alternative” may be a misnomer, as many capital markets players have become mainstream capacity providers.
How did that come about? It’s likely because certain underlying fundamentals that made property-catastrophe exposures such an attractive investment option for capital markets in the first place haven’t changed just because we had one really bad year. Dabbling in insurance still gives these investors the opportunity to diversify their portfolios with uncorrelated risks, as well as earn higher yields than what’s usually being offered by other, more traditional fixed-income securities in this era of historically low interest rates. Meanwhile, insurance risk generally makes up a relatively small portion of overall exposure for most capital markets players, so even a horrible year such as 2017 is unlikely to “ruin” any particular investors, or sour most on renewing.
A few years ago, at this Forum, I noticed that despite all the talk dominating the meeting about the influx of alternative capital providers, none were speaking on the panels, and no securitization specialists or hedge fund managers were listed as attendees. Even though they can no longer be considered anomalies in the insurance business, and the Forum agenda was expanded from two panels to five this year, there were still no alternative market players to be found.
I have always thought of the Forum as the industry’s annual family reunion, where all the major insurers, association leaders, and analysts gather to compare notes about the biggest challenges and opportunities in the year ahead. In that spirit, isn’t it time for insurers to invite their new capital market “in-laws” to the party, hear directly what they make of the rapidly evolving insurance world, discuss their growing impact on the market, and get a sense of what new exposures they may be securitizing, rather than talking about them in the third person?
Rather than being scared away from the insurance realm, investors are probably just as likely to expand their horizons to tackle other hard-to-place exposures, such as cyber risks, flooding, and longevity risk for annuities.
1 Matthew Lerner, “Reinsurance capital up in 2017 despite catastrophe losses,” Business insurance, Jan. 18, 2018
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