Mark Watson, the Chief Executive Officer (CEO) of insurance and reinsurance firm Argo Group, has warned that waiting for hard markets to achieve rate adequacy is an approach that’s unlikely to work in today’s market landscape.
The global reinsurance market remains highly competitive and pressured, with the impacts of 2017 catastrophe events failing to produce the kind of sustainable rate increases that many had hoped for and expected.
Much of the muted response throughout 2018 has been attributed to the permanent and expanding influence of alternative reinsurance capital, which continues to grow its share of the overall reinsurance market pie in spite of experiencing large losses in the second-half of 2017.
In fact, the volume of alternative capital in the reinsurance industry reached $95 billion in the first-quarter of 2018, which means it now contributes 16% of global, dedicated reinsurance capital.
The reaction and influence of alternative, or third-party reinsurance capital has led numerous industry experts and observers to suggest a flattening of the pricing cycle, where post-event peaks and soft market lows are less pronounced, if evident at all, as a result of the availability of an abundance of both traditional and alternative capital.
Speaking during the re/insurer’s second-quarter 2018 earnings call, the CEO of Argo Group discussed the pricing cycle, in light of current market conditions.
“Just to be clear, we don’t run our business based on the existence of a pricing cycle. And if you are a company with the strategy that relies upon the elusive hard market emerging to achieve rate adequacy, I think that this is a strategy that’s probably not going to work any longer.
“As seen after any of the recent loss events, capital is readily available and will flow in and out of the market as needed. In my opinion, the winners in the current environment are companies that focus on clients and make it easier for them to transact business, grow profitably well, continuing to invest in their business going forward and have strong risk and capital management capabilities,” said Watson.
While it’s clearly some more than others, overall, the majority of reinsurers now leverage alternative, or insurance-linked securities (ILS) capacity in some form or another, a trend that is expected to continue.
With capacity in the marketplace expected to remain plentiful, suggesting post-event hard markets might well be a thing of the past, insurers and reinsurers are increasingly under pressure to increase efficiency and profitability in a very challenging landscape.
One of the ways companies are looking to improve their businesses is with technology, and Watson underlined the importance of embracing tech during Argo’s recent earnings call.
“At Argo, nearly two decades ago, we identified technology as a transformative and potentially disruptive force that would ultimately change the way business is transacted in the insurance market. Ours is an industry that historically has been slow to adapt to change and so it should have come as no surprise that it took longer than we anticipated for those trends to emerge.
“We continue making significant steps forward toward our goal of using technology to reshape our business. Every part of our business, from distribution partners, policyholders to employees are feeling the positive impact of our efforts in this area. Overall, we are pleased with the progress we are making in the digital space in terms of development of digital products, partnerships with insured tech-focused companies and modest strategic investments in tech-enabled ventures,” said Watson.
Only time will tell exactly what the re/insurance cycle will look like in the future. However, with ILS capital being a permanent and expanding base of available reinsurance capital it seems that, in the near-term at least, the traditional re/insurance market cycle is increasingly looking like a thing of the past.
