The reinsurance market performed “OK” during the first-quarter of 2018, but the industry needs to understand both the challenge and permanence of over-capitalisation, according to James Vickers, Chairman of Willis Re International, the reinsurance broking arm of Willis Towers Watson (WTW).
“The major challenge for the reinsurance industry is capital,” said Vickers, speaking with A.M. BestTV at the 2018 East Asian Insurance Conference (EAIC), held recently in Manila.
Vickers highlighted a disappointing and flat April renewal for reinsurers, explaining how hopes of a general uplift in the rating environment failed to come to fruition, despite a transition away from rate reductions of recent years as a result of 2017 catastrophe events.
The fact the majority of the April renewals concerned territories that didn’t experience any losses last year meant the market didn’t see a general uptick in pricing during this renewal season, which is widely viewed as a result of the abundance of available capital from both traditional and alternative sources.
In the aftermath of previous heavy loss years, such as 2011 and 2005, rates in the reinsurance segment improved across the board in response to the removal of a substantial volume of market capacity.
However, and as highlighted by Vickers, the inflow and permanence of alternative capital both before and after 2017 cat events, played a more influential role in the global reinsurance marketplace than it did in the past, and as such, served to limit any post-event price hikes.
“So, that doesn’t bode well for the rest of the year, and it also doesn’t bode well for the long-held view of a cyclical nature of reinsurance that soon after a difficult year, rates would move up. It looks at best, the market going forward will be flat,” said Vickers.
“The rates aren’t moving because the traditional market’s capital has remained largely intact, and any of the alternative capital, so called insurance-linked securities (ILS), has been rapidly replenished, and more.
“So, it is clear that the ILS market is here to stay, and it is also clear that it is a very, very deep market. So, the industry has got to understand that there is going to be a challenge of over-capitalisation, and it is not going to go away.
“And, the only way it will be solved, will be by a different paradigm around demand,” continued Vickers.
The ease and willingness of ILS capital to reload and actually expand in time for the January renewals, despite many investors experiencing their first losses just months prior, cemented the commitment of the capital markets to the risk transfer sector. But, at the same time, it also ensured that a supply / demand balance would persist, leading Vickers to call for greater innovation in order to take the reinsurance sector forward.
“We have to sell more original product to soak up some of the additional capacity that’s coming in, that is the only way forward. And, we can do some of that ourselves, with new product development. But actually, we need to take a broader engagement, particularly at a governmental and a parastatal level, to see how the reinsurance industry can help engage in closing the protection gap,” said Vickers.
