Specialty insurer Lancashire said the carrier was bracing for a market cycle reversal with the reinsurance industry operating on the margins of profitability and slowing price declines indicating an upturn on the horizon.
Lancashire Group Chief Executive Officer (CEO), Alex Maloney, said; “I firmly believe that the insurance business is cyclical. We are now trading through what I consider to be a low point in the cycle.”
He pointed to the industry’s narrow escape from major losses in the aftermath of hurricane Matthew in October 2016, suggesting the event could have been the trigger for an ensuing market cycle turn, but a similar future event was undoubtedly due to shake up the market.
“What might have been a major loss to the industry, in excess of those losses we have seen in recent years, in fact caused insured losses of a more attritional nature. There was erosion of earnings rather than serious capital impairment,” said Maloney.
Although the industry was spared more severe losses in 2016, it’s a commonly known factor that the next big loss event is a when not an if, and with all the dominoes falling into place for a market cycle shift, the strained industry is now just one final trigger away from a trend reversal, suggests Maloney; “I have spoken regularly about the current over-supply of capital and the resulting imbalance which this generates, leading to downwards pressure on pricing and coverage terms within the international insurance and reinsurance markets.
“However, Matthew illustrates that the market is operating at the very margins of profitability and that any material catastrophe loss could result in meaningful capital impairment.
“Macro-economic conditions and capital flows will change and catastrophe loss events will occur. Sooner or later the balance of capital and underwriting opportunity will readjust,” continued Maloney.
The Lancashire CEO said the insurer was waiting for “that moment of opportunity” as the insurance industry “cannot afford to operate on such tight margins over the longer term, in particular faced with the threat of a material upturn in global insured catastrophe losses, which will materialise sooner or later.”
Meanwhile, he added, the carrier would ride out the storm with nimble capital management, carefully balancing risk against potential return, and disciplined underwriting.
And although reinsurers moving in closer to the risk complicates the market segment for insurers, the CEO added that the company was readily engaging with and using the sector to minimise its risk exposure; “On the other side of the equation, reinsurance can be an efficient form of capital management which allows us to maintain or reduce our aggregate risk exposures.
“This inevitably depresses returns in the current market, but I am confident that our tactical implementation of strategy will enable Lancashire to manage this stage of the cycle, protect its balance sheet, and meet the challenge of the next market moving event, when it does come.”