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Retro pricing dynamics could disrupt market shares: Third Point Re execs

18th December 2019 - Author: Matt Sheehan

Reinsurers that rely heavily on retrocession could be in danger of losing market share next year if prices continue to increase in response to the shortage of capacity, according to executives at Third Point Re.

third-point-reinsurance-ltd-logoSpeaking in an interview with Reinsurance News, David Govrin, President of Third Point Reinsurance (USA) Ltd., noted that the retro space has seen a large contraction of supply due to recent loss activity and the locking up of collateral from the ILS markets.

Retro rates are therefore expected to rise significantly in 2020, which could create a very difficult dynamic for some parts of the reinsurance market, Third Point Re believes.

“Capacity for retrocessional reinsurance is relatively small compared to the primary catastrophe reinsurance market,” Govrin said while discussing the market outlook for 2020.

“The question is whether the clearing price can bring in capacity. If the price is too high, then reinsurers may be better off reducing their top line property cat portfolios versus paying for more retro.”

He added: “There could also be a shift in market shares where reinsurers, who had excessively high-top lines relying on retro (quota share and excess of loss) will lose market share, and it will be picked up by reinsurers who are not reliant on retro.”

Eventually catastrophe reinsurance pricing will also increase in response to the rise in retro pricing, Govrin noted, but those rises are likely to be smaller than in retro.

That said, Third Point Re believes the retrocessional market beyond 2020 could correct relatively quickly if there is light loss activity next year.

Reinsurers will also be under pressure in 2020 due to a number of other factors, Third Point Re executives told Reinsurance News, including low interest rates, catastrophe loss activity, and concerns regarding US casualty costs.

Additional factors include the loss of ILS capital, which was a large supporter of reinsurance capacity, as well as regulatory pressure on business plans driven by Lloyd’s and the rating agencies.

However, Dan Malloy, CEO of Third Point Re, explained that the company would “generally benefit from the market dislocation,” given that it is not heavily reliant on retro.

“Our long-term strategy continues – to generate profit from underwriting while achieving reinsurance market leading investment returns,” Malloy said.

“We have reduced our asset risk and have allocated more capital to underwriting risk in order to improve our underwriting result,” he continued. “We will continue to write and add lines of business that produce acceptable underwriting profit and restructure or eliminate portfolios that are not meeting our profitability goals.”

Govrin further noted that Third Point Re intends to keep its property cat portfolio focused on peak zones, with some changes in the mix of business, which will be more weighted towards retro excess of loss.

But outside of catastrophe lines Third Point Re sees much slimmer opportunities, as heated competition is making it difficult to achieve reasonable margins.

Tracey Gibbons, Senior Vice President of Specialty Reinsurance, said that, in these lines, cedents have become used to continued rate reduction and broadening of cover, with many buying their reinsurance from the cheapest available markets with little thought for the quality of the cover.

Nevertheless, Third Point Re does see some opportunities in specialty reinsurance, having brought in a new team in Bermuda earlier this year to write business lines including Contingency, Product Recall, Crisis Management, Pandemic, Kidnap and Ransom, War, Terror and Political Violence, Workers Compensation and PA/Life Catastrophe.

“This team is a recognized lead in many of the classes it writes,” Gibbons told Reinsurance News. “They have the expertise to operate in niche markets where there are relatively high barriers to entry due to the technical knowledge needed to underwrite the class.”

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