Good News is Bad News? Or is it the other way round?

With the “results season” for the (re)insurance industry now essentially finished, it is worth trying to discern whether there are any potential changes in direction or new trends in the long downward march in pricing on many commoditized product lines.

The good news is that the level of losses experienced in 2017 were easily absorbed and paid. The bad news is that not much has yet truly changed.

Clearly, after the third-highest Insured Loss year on record (at, say, USD 136BN) during 2017, there had been the hope that this would lead to a significant trend reversal in pricing, particularly in loss-affected lines. So far, the news is decidedly mixed, with only modest increases year-on-year during January renewals for unaffected lines, and few increases beyond the “teens” even in significantly loss-affected lines according to market intelligence and public statements from major participants trying to put a brave face on their environment. Of course, as most of the largest losses were in the US, its key July renewal timeframe could reveal a more robust trend. As Marsh stated in its overview of Q4/17 pricing, its global composite commercial insurance index may have increased in Q4/17 for the first time in almost 5 years, but that gain was only 0.8%.

So, the question has to be asked: why so little apparent change, at least so far?

One reason is surely that there is still an abundance of capital available in the reinsurance (let alone the insurance) industry, estimated at some USD 516BN at year end by Aon Benfield, with an ever increasing amount from “alternative” sources such as ILWs, CAT bonds and collateralized vehicles; and the events of 2017 do not appear to have diminished the appetite for such investment to any material extent.

Secondly, and paradoxically, the losses were not severe enough. Berkshire Hathaway’s Warren Buffett caught attention by stating that the group’s insurance businesses could withstand a USD 400MM “mega-CAT” hitting the overall market. Other market participants might be a little less sanguine about that; and wonder whether Nietzsche’s dictum that “what does not kill me makes me stronger” was something they might not wish to see tested. Of course, they might also wish to consider: “To live is to suffer, to survive is to find some meaning in the suffering”. It remains unclear whether there is a level of losses that would demonstrably cause a step-change in pricing.

A third factor, which is still whispered softly, is that perhaps demand for commodity NatCAT and other lines is not quite as robust as one might be led to believe; which then raises the spectre of too much competition for premium meeting too much capital – which usually ends badly.

Ironically, one factor that might at least begin to stem the inflow of alternative capital would be a significant rise in short to medium term interest rates, reducing the relative attraction of returns from CAT bonds, unless their own yields also rose significantly.

All of this should lead to the realization by any self-respecting reinsurer that it should be looking at premium flows which are not subject to the vagaries of NatCAT; are sustainable and predictable; and yet also provide a demonstrably superior risk/reward outcome.

At Awbury, this is our raison d’être, with our unflinching focus on credit, financial and economic risks across multiple sectors; which acts as the means of providing those sought after, longer term premium flows in areas which have minimal correlation with commoditized product lines, and continue to retain pricing power.

The Awbury Team

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