Reinsurers are saying that the debate is driven by technical considerations. Could this mean that they already consider the market as being at its lowest sustainable level?
Reinsurers say that each risk is assessed on its merits. They conduct
technical pricing for their risks and take a longer-term view. All of which is a product of reinsurance underwriting becoming more sophisticated and professional. They are just better now at managing their risks and regulation, or the approach of regulation has played its part.
There is a good argument to say that the reinsurance industry has come
a long way in its efforts to break the worst effects of the reinsurance pricing cycle. The demand for price cuts when capital levels are high would appear to turn back the clock.
Bryan Joseph, global head of actuarial insurance services at PricewaterhouseCoopers, maintained that companies are indeed making money and that the favourable cat season helped reinsurers build up reserves; however, he said that excess capital in the market was linked to the ‘reserving cycle’.
“However, at the moment, there are people who are possibly declaring
more profit than they should because they might be reading the reserves. There’s a reserving cycle just like there’s a pricing cycle.
“One of the important things people need to be aware of is where a
reinsurance company would sit in that range of reserving. Do they feel peer pressure? Well some of them do, but it’s part of the reserving cycle.”
Are there companies out there that would use the capital they have amassed in order to move into new lines? Would their presence in new lines and markets increase competitiveness and drive down rates? Or is risk-based capital regulation now making it difficult for reinsurers to use their capital in a way that supports risky price cuts?
Henry Keeling, president and chief executive officer of Guy Carpenter’s
international operations, said: “Excess capital is being returned to investors in many cases. For some companies, this may be productive, but it might also be giving up a competitive advantage.”
Keeling added that reinsurers could instead place excess capital into
areas such as new technology and emerging markets. “Returning capital does not make for profitable growth—innovation does,” he said.
Reinsurers, he said, need to prepare for a raft of new risks ranging from
emerging market business lines to regulatory capital pressures. Chris Klein, head of global reinsurance markets at Guy Carpenter, pointed to
factors that would support rate increases and that are “waiting in the wings”.
In the first half of 2010, the non-life reinsurance industry saw an overall underwriting loss of $901 million compared to a gain of $2.4 billion in the same period in 2009.
In addition, prior-year reserves cannot be expected in such volume in 2011 and the years ahead, while regulatory changes threaten to increase the cost of capital.
James Vickers, chairman of Willis Re International, said different
reinsurance companies would act differently on the question of whether holding excess capital allows them to drop pricing.
“It all comes down to the tension of stock holders in the company. If you
are a Bermuda company and you are looking for a return over a relatively short timescale, you are going to be under a completely different set of pressures than the big reinsurers,” Vickers said.
“The managers of these businesses get pushed in completely different
directions. I think the name of the game is shareholder and stockholder expectation management. The companies who are lucky are those who have people at the top who take a long-term view.”
He added that it was natural that in times of excess capital, clients expect a “bit of a break”.
“Look at the primary companies, they are struggling desperately for their growth, which is being squeezed. Of course, they think they deserve something.”
Vickers suggested that international insurers and reinsurers were perhaps “hoarding capital” due to uncertainty over forthcoming solvency capital increases in major markets and Europe in particular.
“There is a lack of clarity over Solvency II from a capital point of view. Until they know the rules of the game, reinsurers will be unsure.”
It seems that the debate over the effects of excess capital on pricing is set
to develop further as reinsurers point out new standards, technical pricing procedures and regulatory capital requirements. Whatever the truth might be, it seems likely that the old arguments will rumble on at least for the foreseeable future.
November 2010 | INTELLIGENT INSURER | 21
“ There have been numerous comments made with respect to the reinsurance industry having excess capital, with estimates ranging from $18 to $85 billion. My first response is that there may well be a perception of over- capitalisation, but if we had a one- in-500-year tail event, that perception would change very quickly.”
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