If you don’t know where you are going, you might wind up someplace else…

In homage to the late and great Yogi Berra.

Now that the Rendez-Vous is over for another year (with the Awbury contingent having departed with livers more or less intact); and the nights are starting to draw in across the northern hemisphere, what is the mood in the (re)insurance market?

In Awbury’s view, while we had many productive meetings in Monte Carlo focused on our E-CAT, financial and economic catastrophe insurance franchise, all is definitely not well with the broader market; and the mood is subdued and apprehensive at best in many quarters.

There is no real sign of rates hardening; terms and conditions are being weakened; cost ratios are still too high and seemingly inflexible; and the primary market is buying less reinsurance from fewer markets. In the EU, Solvency II may provide some relief in terms of demand from lower-rated primary markets, but is unlikely to make a material difference to demand.

And the calm before the “CAT-storm” continues, as Aon Benfield pointed out: “2015 is on track to be the lowest catastrophe loss year since 2006”. Losses to date are seemingly running at barely 25% of the 10-year historical average, reinforcing a buyers’ market for NatCAT covers.

Reinsurers’ ROE’s have trended down, yet their returns have been flattered by persistent releases of prior years’ reserves, in an attempt, one would suspect, to offset further declines in investment returns. Reserve releases simply cannot continue for much longer at current levels, while reinsurer CIOs are tempted to seek higher returns, which may not turn out to be all they appear on a risk-adjusted basis and the value of bond portfolios is vulnerable to interest rate rises, awaited with bated breath. Some are also returning capital to shareholders in an admission that they cannot deploy it in ways that meet acceptable hurdle rates.

Add to this the various initiatives that, while laudably aiming to improve the efficiency of processing and documenting policies, will almost certainly lead to further commoditization in many business lines in terms of pricing as well as market dominance; and one can understand the lingering mood of uncertainty and doubt.

It seems to us that the market is clearly bifurcating. If, according to AM Best, the top 10 P&C reinsurers now underwrite over 70% of available premia, then there are likely to be two ways in which to survive and prosper (and thus avoid irrelevance and inexorable decline). The first, as evidenced by M&A activity, is to combine scale and diversification with improved operating efficiency. The second is to focus on non-commoditized, non-correlated lines of business, where intellectual capital and the provision of customized solutions to what clients actually need are fundamental; and for which pricing power had not been competed away.

It will come as no surprise to our regular readers that the Awbury Group is a steadfast proponent of the second approach, while maintaining a healthy level of paranoia to ensure that we never assume that there is only one “right way”, although we do try to have an idea of where we are going!

– The Awbury Team

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