Speaking at an AM Best expert panel that discussed the need to ford the gap between available capacity and reinsurance demand, Aditya Dutt, President of Aeolus Capital Management, suggested that despite heavy losses in recent years, such times have often acted as a catalyst for innovation in the market.
Dutt described the renewal season as difficult, with prices, terms and retention levels all changing. He explained that this was largely the result of cedents and reinsurers reaching a realistic meeting point, and increased retentions by primary insurance companies in the property catastrophe space.
He added to his sentiment of innovation, citing the property catastrophe modelling that developed significantly after 1992.
He also noted that insurance-linked securities followed suit in the early 2000s as investors saw merits in a non-correlated asset class.
Dutt said, “It’s now $90 billion or $100 billion of capital that is seeking that non-correlated exposure. I would argue in the future, the specialist property cat reinsurance company would take the form of an ILS fund because that’s where you can deliver this distilled property cat exposure to an investor who really wants it.”
Dutt added that the diversified model is also critical in that it allows rated companies to leverage their capital more effectively by writing a diversified portfolio of risk.
He also said that while mixing the primary insurance business with reinsurance is another method, the demands contained within can differ. He commented, “Reinsurance focuses on underwriting and portfolio management skill. The primary insurance business focuses on operations, scale, costs and underwriting excellence.”
Liz Cunningham, CEO of Somers Re, who also spoke at the panel, noted that the risk profiles of a primary insurer and reinsurer are completely different.
Cunningham added that while both are regulated industries, the regulation that primary insurers face is very distinctive.
She observed that the difficulties surrounding the January 1 renewals did help to sharpen the focus on the importance of maintaining good long-term relationships throughout the cycle, but she characterised it as a providers’ market.
Meanwhile, Carlos Wong-Fupuy, Senior Director of Global Reinsurance, AM Best, suggested that the market dislocation did not reach the level expected by some back in December, possibly because the segment had already adjusted.
He said, “For several years, AM Best has observed the primary segment’s profitability levels outperforming the reinsurance segment. There was excess reinsurance capacity being deployed into working layers in the primary segment at favourable terms, which probably should have retained that exposure.”
Now that adjustment is being made, which Wong-Fupuy believes could be healthy for the primary and reinsurance segments.
