Phillip Pettersen
Towers Perrin Re (Bermuda)
Many markets co-exist within our industry and, at any one time, they
The property cat market
can be out of synch with each other. So to answer the question, one needs
to narrow down the field.
The reinsurers that concentrated on the property cat market enjoyed
a benign year in 2006, after an annus horribilis in 2005, as the Queen
For the purpose of this discussion, I am going to ignore the insurance
might call it. The relatively low claims experience in 2006 gave
market, other than to describe the factors that affect the reinsurance
everybody a breather, a chance to regroup.
market—for example, the recent developments in Florida—and focus
on the reinsurance and the retro markets. I’d like to further restrict my The price for cat business rose sharply due to the supply and demand
comments to the property catastrophe market and also offer my perspective situation and allowed the reinsurance market and the retro market to
on the casualty market as it exists in Bermuda. obtain top dollar for its capacity through the 2006 renewals. Those
companies that kept their powder dry and did not use all their capacity
Factors that drive market cycles
at January 1 and April 1, were able to obtain much higher rates online
at June 1 than were available previously.
One of the most basic factors that affects the market is the amount of
surplus capital relative to premium income—which intensifies competition
Due to the losses experienced in 2005, greater reliance was placed
and ultimately pricing. A hedge to chasing down premium is to further on actuarial input and cat models to adjust the exposures that both
diversify the
portfolio by
accumulating
non-aggregating
Bermuda Reinsurance asked Phillip Pettersen to ruminate on the
exposure and/or
state of the insurance markets and answer the question:
entering into or
growing other
are we in a hard or a soft market?
business classes,
such as casualty.
Therefore, the
expectation of profit relative to the volatility (e.g. retro) inherent in any the buyer and sellers of capacity had. Cat modelling firms recalibrated
class or subclass, will cause a shift in the capital allocated. This is tempered their models, and the rating agencies imposed new capital requirements
only by the analysts’ and/or rating agencies’ views of what relative value relative to inherent volatility. This caused most markets to shed premium
will be created by going into the class of business.
and/or territories, so that their books weren’t quite as exposed as they
had been in the previous year.
The recent development of the sidecar concept has allowed investors to
enter or leave the market dependent on internal financial ROE expectations.
This reshuffle, and the shedding of aggregate, meant that the hedge
The losses from 2005 and prior years have led to a significant realignment
funds could more successfully play in the ILW market and obtain the
of capacity (withdrawal). This has created an environment of expected
sorts of rates online that one dreams of. The mega players were able to
profit, resulting in capital flowing to these vehicles and creating new and
meet the demand with exceptional opportunistic pricing deals.
expensive capacity. Legislation can also be a driver of market cycles in both
After 2006, of course, everyone looked good. Certainly, there were
positive and negative ways. The new legislation enacted in Florida will storms in the US and elsewhere, but nothing that would take the shine
have an influence on the cycle. off a great year.
BermudaReinsurance . February 2007 49
Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52