September 26, 2016


The State of the Reinsurance Industry


JUNE 1-2, 2015


by Lee Van Slyke

Three reinsurance CEO’s reported that there is an excess of capacity, making it nearly impossible for reinsurance companies to realize their traditional goals for ROE of 12% to 15%. A culture not to try to “shrink to success” causes companies to seek tactics that maximize revenues even though premium rates are less adequate than in the past. There are emerging risks that may provide premium growth in the long run but the industry struggles to find ways to insure those risks and be paid for doing so.

John Berger, Chairman and CEO of Third Point Re, Carole Ferrero, President and Chief Underwriting Officer of General Re, and Ed Noonan, Chairman and CEO of Validus Holdings, Ltd., opened the two-day conference by fielding questions from Bruce Fell of Deloitte Consulting. One perspective is that the days of ROE goals of 12% to 15% are probably over, at least as long as alternative stock investments are in companies that earn ROEs of 5% to 10%. Another is that for many classes of reinsurance, though not all, the bottom of the market cycle has been reached and prices are becoming more adequate.

The biggest impact on prices has come from the influx of new capital into Insurance-Linked Securities (ILS) and hedge fund-backed reinsurance companies, both with ROE models different from traditional stock reinsurance companies. Third Point Re is a hedge fund-backed reinsurer. Validus Holdings, though diversified, is a major player in ILS. General Re is owned by Berkshire Hathaway. In an important sense, all three panelists represent companies with non-traditional capital models. Berger reported that with the completion of deals for the hurricane season beginning on June 1 the capital in ILS is about $70 billion.

Reinsurers don’t take advantage of the low prices by buying more reinsurance, according to Michael Toothman. In response to his question why they don’t the panelists presented a consensus view that it is perceived ineffective to “shrink to greatness”. Not mentioned was that Validus Group has completed share repurchases totaling $1.8 billion, or about 180% of its initial capital. (Validus was founded in 2005.)

Thomas Johansmeyer of ISO, Michael Millette, recently retired from Goldman, Sachs & Co., and Carlo Segni of the World Bank described new insurance products and new markets for ILS. Segni explored the importance of insurance products in underserved emerging economies. The World Bank has many initiatives to provide insurance products to these communities, particularly for business owners just emerging from poverty, Segni said.

Millette explained that new kinds of risks lurk in old kinds of contractual relationships. Citing a cyber attack, he questioned whether today’s contracts would transfer financial responsibility as the insurance companies expect. This could be addressed, he said, by creating objective triggers for coverage, embedding those in reinsurance contracts and then in retail insurance contracts, which would make it important for corporate risk managers to place similar wording in their contracts with suppliers of goods and services. One clear advantage over the prevailing ambiguity of contract wording is that insurers would get paid to take the risks they may be taking anyway.


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