Reinsurance market drivers shift as alternative capital makes mark

MONTE CARLO, Monaco — The limited increase in property catastrophe reinsurance rates that followed the massive 2017 hurricane losses signifies a change in market dynamics where traditional reinsurers have less influence on pricing, capital markets experts say.

The largely uninterrupted flow of alternative capital into the market following more than $140 billion in cat losses last year ensured that plentiful capacity remains in the market and reinsurance price increases were limited at subsequent renewals, they said during a panel discussion Monday at the Rendez-Vous de Septembre reinsurance meeting in Monte Carlo, Monaco.

Going forward, insurance-linked securities could take a larger share of the reinsurance market, including providing coverage for risks outside of the traditional property cat sector such as cyber risk. However, the whole market needs to get a better grasp of the exposures involved, they said.

The key takeaway from the markets muted pricing reaction to the 2017 catastrophe losses “is that Bermuda and the reinsurers lost price leadership,” said Christopher Campbell, vice president at Keefe, Bruyette & Woods Inc. in Baltimore.

Unlike after previous large catastrophe losses — such as in 2005 and 2011 — widespread rate hikes did not follow the 2017 storms, he said during an ILS Roundtable sponsored by Munich Reinsurance Co.

At the June 1, 2018, property catastrophe renewals, for example, some Florida-based insurers who had suffered losses from the 2017 storms renewed at lower rates than last year, Mr. Campbell said.

“It feels like the traditional reinsurance model, at least in property cat, is broken,” he said.

Last year was also the first time that alternative capital providers to the reinsurance market suffered significant losses, yet capital suppliers were not deterred by the losses and moved more capital into the reinsurance sector, panelists said.

While reinsurers were disappointed by the limited increase in pricing, market forces prevented further increases, said Peter Roeder, a member of the board of management at Munich Re.

“From a rational standpoint, it is what it is, and it’s following simple supply and demand logic,” he said.

Going forward, the ILS sector will be an established part of the global reinsurance market, said Chin Liu, a Boston-based managing director at Amundi Pioneer Asset Management, which invests in insurance-linked securities.

“It’s no longer a niche alternative asset class,” he said.

ILS investors and investors in other forms of alternative capital were not deterred by the 2017 losses, in part because they understand the risks involved but also because other asset classes produced good returns last year and “that motivated them even further to look for diversification,” Mr. Liu said.

ILS products could potentially take a larger share of the reinsurance market, said John Modin, a New York-based managing director at Citigroup Inc.

ILS makes up about a quarter of the capital supporting the reinsurance market, he said. “There is still room to grow … I don’t think it will ever be a half, but a quarter to a third is where it may end up,” Mr. Modin said.

The ILS market could potentially be a source of capital to cover cyber risks, however, it remains difficult to model cyber risks and assess accumulation of the risks under insurance and reinsurance contracts, said Mr. Roeder of Munich Re.

“That should be a big challenge for the ILS market … to find something innovative to get closer to the risk, because the demand will be there, there is no doubt about that,” he said.

There has been a lot of expectation that ILS managers and investors will take on cyber risks, but the challenge is modeling the risk, Mr. Liu agreed.

“ILS investors come in as an efficient source of capital, as an alternative source of capital but overall their goal is to make a profit,” he said.