Reinsurers are adapting their business models in light of the market’s increasing reliance on alternative capital, which proved capable of absorbing large industry losses in 2017, and which may have ended the concept of ‘payback’ in the property & casualty (P&C) sector, according to analysts at J.P. Morgan.
A report by the firm suggested that net exposure to natural catastrophe risks has been falling for traditional players, and said this may result in a continued focus on other activities, such as proportional reinsurance, tailored transactions, and other specialty markets that may prove difficult to disrupt.
Such approaches may reduce reinsurers’ ability to over-earn in benign years, but do also point to a more predictable earnings stream overall, which may demonstrate less pricing cyclicality, J.P. Morgan said.
Alternative capital has been growing its market share of the reinsurance sector for over a decade now and currently contributes around 15% of industry capital, although its response to a single large catastrophe event had not been tested prior to 2017.
J.P. Morgan believes that the insurance-linked securities (ILS) sector came through this period with an enhanced reputation, as it settled losses without any complications and has since continued to be viewed by buyers as an effective method of ceding risk.
Additionally, the sector was extremely quick to raise new money, which has resulted in a very muted reaction in property catastrophe pricing, and which prevented reinsurance earnings from experiencing an upswing similar to those seen following previous catastrophe loss years.
However, while J.P. Morgan may have previously considered alternative capital to be a disruptive force, pressuring industry pricing, analysts now consider it to be an established provider of capital, which it is able deliver with a lower return expectation that traditional reinsurers can sustainably tolerate.
The report proposed that reinsurers must now adapt their business models in several ways, given that catastrophe risk may never return to historical levels of profitability.
These may include growing proportional business, growing bespoke and tailored transactions, using ILS as a method of ceding risk, expanding into primary and specialty markets, growing life reinsurance, and returning additional capital to shareholders.