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The question is whether changes are cyclical or structural: Roundtable

22nd November 2019 - Author: Charlie Wood

With re/insurance a completely different market now than the one 18 months ago, key industry executives speaking at the 2019 Reinsurance News Monte Carlo Rendezvous Roundtable reflected on whether the longer-term decline in rates is cyclical or structural.

RoundtableIf it has been cyclical and the factors driving this new upward phase of the cycle are significant, then the industry is going to move back up and stay there for a while, explained David Flandro, Managing Director of Analytics at Hyperion X.

“But if the structural changes which drove rates lower between 2013 and 2017 remain in place and there’s nothing more to counteract them, then we’re going to bounce along the bottom.”

“That’s the question we have to answer. We won’t know the answer for another year, but it will become evident as we go through this next stage,” noted Flandro.

RFIB Chief Executive Officer Steven Beard considered these changes as structural, and requiring of different business models, talent and flexible capital to address.

“Those waiting for a hard market and a contraction of capital will be disappointed in the coming years,” said Beard.

Mike van Slooten, Head of Market Analysis at Aon Reinsurance Solutions agreed that there has indeed been a structural shift, noting how one of the challenges for the industry is that the lower the interest rates go the more capital seems to enter our sector.

“There is a lot of capacity out there at the moment and if we get into a recessionary environment and interest rates continue to track lower,” explained Slooten.

“Assuming we work though some of the issues that have emerged over the last couple of years, over the long term you’re going to see even more capital coming into the industry.”

“I definitely think it’s a structural change” added Sean Bourgeois, CEO & Founder of Tremor Technologies. “For me why it’s a structural change is that it’s really moving the market from risk selection to sophistication of portfolio construction.”

“For capital providers that are really good at portfolio construction the benefits you get for completely uncorrelated investments are amazing, and they have a lower hurdle to get over in terms of their target.”

Mike Mitchell, Head of Property & Specialty Underwriting at Swiss Re, concluded by noting how, whether it’s a cyclical or a structural shift in the marketplace, the reality is that the capital which has been deployed hasn’t been making returns that justify the volatility of the underlying business.

“What we’ve seen is a slow bleed into that realisation, driven by individual pockets of loss activity,” he explained.

“So, while there’s clearly a need for a broader reset across the system, in the absence of a loss trigger it’s becoming pretty hard for underwriters to drive rates into a sustainable level of profitability.”

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