Look out for the Technicals…

No, we are not thinking of the improvised and brutally effective instruments of war popular in the Horn of Africa, but rather the ever-present issue of whether or not pricing in the (re)insurance markets adequately reflects the risks being accepted, or have sunk below the “technical” levels at which even the (re)insurers’ models say that a net underwriting loss is more than likely.

After the surge in insured catastrophe losses in the second half of 2017 (with Swiss Re Sigma and Munich Re tallying overall 2017 insured losses at around USD 135BN), there had been some hope amongst beleaguered and battle weary underwriters (suffering from PTSD- Premiums [are] Tanking Still, [we’re] Doomed) that the “1/1” renewal season would see sustained increases across the board in NatCAT pricing. However, this has proved to be largely a chimaera.

Ironically, the fact that ILS and other alternative capital sources (estimated by AON Benfield at some USD 82BN at end of Q3/17) responded in a timely manner, when coupled with more than adequate “traditional” reinsurer capital of some USD 518BN (so, USD 600BN in all), resulted in buyers often being able to call the bluff of underwriters holding out for significantly improved rates. There is now certainly a case to be made that ILS and other sources of “alternative capital” are to “traditional” (re)insurance as US tight (or shale) oil are to OPEC- i.e., the new form a swing producer, setting a cap on the ability of the market as a whole to sustain prices outside a range.

There were some exceptions, but most non-affected business lines appear to have stabilized at best in terms of pricing, with rates for severely-impacted North American policies managing to eke out increases, but even “double digit” increases hardly compensate for the loss of, in some cases, years of profits within such a short space of time.

Of course, NatCAT (re)insurance did exactly what it is supposed to do, providing capacity in an orderly, if at times, frenetic renewal process. However, that is cold comfort for managements and investors whose visions of the long bear market in rates ending appear to have been badly disappointed, as initial reports from leading brokers such as Willis, Aon Benfield and JLT have consistently emphasized- and this in an environment in which investment returns on the standard, fixed-income-heavy P&C asset base remain constrained; and in which the ability to continue with reserve releases is also diminishing.

All this then begs the question of how (re)insurers will respond. The search for new premium sources is likely to continue unabated; sub-scale businesses with no comparative advantage are likely to continue to be “prey”; and, yet again, executives will mouth platitudes about maintaining their “disciplined” underwriting processes, as they seek desperately to differentiate themselves from the average (which is still close to the median.)

New thinking and paradigms are desperately needed if the industry is to move, in developed markets, away from its strong correlation with overall GDP growth. Can Bitcoin Re be long in coming?

At Awbury, we are fortunate in having no “legacy” issues or processes, but our success continues to be based upon delivering to our partner (re)insurers, significant high quality, non-correlated premiums with excellent loss experience, and upon our ability not to be constrained by traditional approaches.

We cannot be a panacea, but we can help provide new sources of business.

The Awbury Team

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