The global reinsurance industry is undoubtedly a vital part of the risk value chain, but it needs to go back to basics and avoid the mistakes of the last five to 10 years, according to industry experts.
Speaking yesterday on the final panel of the opening day of ILS Bermuda’s 2022 Convergence conference, experts and executives from across the insurance, reinsurance, and insurance-linked securities (ILS) sectors discussed the role of reinsurers.
“The reason we need reinsurance is because there is a set pattern for different roles along the risk value chain, and the value of reinsurers is they help diversify volatility,” explained Albert Benchimol, President and Chief Executive Officer (CEO) of AXIS Capital. “I think that the absence of the reinsurance industry would cause a significant amount of hardship along the curve.”
In recent times, social inflation trends have increasingly contributed to elevated losses from catastrophes and so-called secondary perils for reinsurers. Add to this the pressures on investment income in a low interest rate environment, although yields are now rising, as well as some fairly serious structural issues in certain markets, such as Florida property, and it’s clearly been a difficult period to navigate for some.
With many reinsurers noting a need for more rate in many lines of business, especially within the catastrophe space, numerous players have, to varying degrees, pulled back from the cat arena, while others chose to exit the catastrophe reinsurance space entirely.
One of the re/insurers to do this was AXIS Capital, who announced back in July its intention to shift to a specialist reinsurer with a commitment to casualty, specialty, A&H, and credit lines.
According to the company’s President and CEO, “The world doesn’t need the reinsurance industry of the last five or 10 years.” Instead, “It needs a new, more disciplined reinsurance industry that has more respect for its capital and my hope is that we’re going to start to see that,” said Benchimol.
Expanding on this, Peter Bell, CEO of Everest Reinsurance Bermuda, said that it’s all about capital, but that over recent years, it’s become diverged, and reinsurers haven’t been making as much money as they should have been.
“It’s a question of making sure that we price the product properly, and also understand what product we actually want to give out,” said Bell. “It’s just going back to basics. You know what they said in CIAB was very different to Monte-Carlo, Ian was just the last nail in the coffin. Because Ian in itself is not a massive loss, it’s just off the back of Ukraine, COVID, inflation.
“So whichever way you want to look at it, you know life has to change for a reinsurer. It’s going to be back to basics, charge the right price, and then make sure it’s what you actually want.”
According to Mike Millette, Managing Partner, Hudson Structured Capital Management, the mission of reinsurance is to be at the centre of wholesale risk markets, but not to be all of wholesale risk markets.
“Wholesale risk markets will include investors in funds, investors in sidecars, other participants. So, a broad world of wholesale risk markets, that are pricing and bearing different vectors of volatility,” said Millette.
That part of the business has had, he continued, perhaps two main problems.
“One problem is perhaps discipline, certainly discipline. But another problem is that the wholesale risk market is working to try to find its way out of a dying paradigm. It needs to simply re-price, re-term, re-baseline its business, and I think that that’s going to be an exciting endeavour,” said Millette.
Panellist Kathleen Reardon, CEO of Hiscox Re & ILS, agreed that without reinsurance, the insurance model would need to undergo fundamental change.
“Reinsurers are needed, reinsurers make the world turn. Without it, insurance companies cannot function efficiently,” she explained. “It gives the insurance industry the space to step back and innovate and the reinsurance community provides diversified, large balance sheets to help keep the insurance companies solvent.”
She also highlighted the need for discipline, “to make sure that all along the value chain the risk is being apportioned appropriately.”