Bountiful reinsurance capital and some cutbacks in buying by primary insurers have combined to create a challenging environment, a trio of reinsurance executives, all CAS Fellows, told an audience of about 200 at the CAS Reinsurance Seminar in Boston in June.
The executives — Barton Hedges, CEO of Greenlight Re; David Marra, president of Renaissance Reinsurance U.S.; and John Rathgeber, CEO of Watford Re Ltd. — entertained a series of questions from Aaron Koch, a director at Milliman USA, on the state of the reinsurance market. They also gave insights on how they moved from the actuarial shop to the executive suite.
On one hand, the executives agreed, capital is overflowing from the property catastrophe market into other lines of business. Short-tail casualty lines like aviation, marine, energy and agriculture have absorbed more than their share, said Marra.
Rathgeber concurred. “There has been a spillover effect,” he said. “All lines of reinsurance are soft unless there has been loss activity.” Commercial auto losses have driven rates higher, he noted.
While capital has been flowing for several years into the market through insurance-linked securities and collateralized reinsurance, some larger insurance companies have purchased less reinsurance.
In the absence of major catastrophic events, rates seem unlikely to rise in coming years, though he noted that decreases were smaller at June 1 than in prior years. It has also become more difficult to raise new capital, which could foretell a discipline that could eventually force rates higher.
“Every market seems . . . to be bumping along the bottom right now,” he said. “It’s going to take a while before the market gets better.”
Perhaps the market will improve in the second half of the year, Hedges continued.
While capital has been flowing for several years into the market through insurance-linked securities and collateralized reinsurance, some larger insurance companies have purchased less reinsurance.
Big data and predictive analytics are likely to change distribution channels by taking expenses out of the system.
Some are creating captive reinsurers to hold their own risk. Several panelists noted that Ace Ltd. (now Chubb) has moved some of its risks to a captive reinsurer. As one of the largest insurers, Ace’s actions could portend a trend, they said.
Recently though, there are signs cedants may be returning to the market, Rathgeber said.
In coming years, Solvency II and changes to A.M. Best’s rating model may encourage smaller insurance companies to buy more reinsurance, he said, particularly for companies that might be vulnerable to super-sized catastrophes.
Still, panelists were satisfied with market discipline, particularly in preventing excess capital from accumulating. Reinsurers have been using profits to increase dividends or buy back shares rather than to support new business, which would probably have been written at still lower rates.
It is a market reaction to the new ability to quickly raise third-party capital via insurance-linked securities like catastrophe bonds and collateralized reinsurance, Hedges said.
Rathgeber agreed. He took the exams after spending several years underwriting. He said they made him a better underwriter, and later, a better manager.
Moderator Koch asked about how the panelists were managing their asset risk. All insurers and reinsurers earn income on premium while waiting to pay claims and expenses, but two of the reinsurers represented on the panel — Rathgeber’s Watford Re and Hedges’ Greenlight Re — are associated with hedge funds, which sometimes pursue more aggressive investment strategies than reinsurers typically employ. While most reinsurers pursue conservative investments to complement their underwriting, reinsurers whose assets are managed by hedge funds must work carefully to balance the additional asset risk.
“We have to build a liability portfolio around the asset portfolio, instead of the other way around,” Hedges said.
Rathgeber said Watford pursues a fixed-income strategy. Until recently, credit spreads in high-yield had widened, particularly among energy issues — a segment that Watford hadn’t pursued heavily. The situation didn’t allow the early growth in book value that the reinsurer had hoped for, perhaps, but capital hasn’t been destroyed either, and some of the unrealized loss positions have now recovered in value.
“If there’s trouble in the high-yield space, we are at risk of suffering sizeable realized losses,” he said, but current fluctuations haven’t caused such a problem. A company needs sufficient liquidity to handle the ups and downs, he said.
Big data and predictive analytics are likely to change distribution channels by taking expenses out of the system. Rathgeber agreed with this notion, but he worried about a potential backlash by regulators and others over privacy concerns.
Reinsurance could be well situated to benefit from the shifting marketplace, said Hedges, of Greenlight Re. Innovative insurers might need more capital quickly, he said, and reinsurers could become the risk takers behind them.
If that happened, Hedges said, reinsurance — “this thing out of the Ice Age that hasn’t changed much . . . could take the market by storm.”
As members of the CAS, the panelists and moderator had thoughts on the future of the actuarial profession and its practitioners.
The actuarial exams are “a great process,” Hedges said. To move to the CEO chair, though, it is important to learn about nonactuarial parts of the business. Many actuaries are figuring that out, he said, based on how many are taking on diverse roles at his company.
Rathgeber agreed. He took the exams after spending several years underwriting. He said they made him a better underwriter, and later, a better manager.
Marra emphasized communication skills to top off the actuarial knowledge — knowing what to say to people and the value of discretion.
“Your job is not to show they might be wrong,” he said. “It’s just the opposite.”
James P. Lynch, FCAS is chief actuary and director of research and information services for the Insurance Information Institute.
