Reinsurance Roundtable
In association with:
Our panel discussed ways to thrive in the current conditions and the pros and cons of diversification.
What are the key challenges facing the reinsurance sector at present?
Mark Berry: There are two ways to answer the question, the first is strategically, and the other tactically. There’s an influx of new capital from a sector that requires a lower hurdle rate than traditional reinsurance, which presents its own set of challenges. This is then combined with the incumbent markets trying to service the capital we already have, meshed with an innate desire for both those segments to grow.
Strategically, it in effect becomes a double-edged sword because we’re looking to increase returns on capital when we’ve got supply and demand past equilibrium, so we’ve got a decreasing marginal return on capital. Meanwhile, we’re all trying to grow in a declining market with lowering rate adequacy levels, knowing that one of our competitors is retention, with a lot of our clients looking to service their own capital at a grass roots level.
Tactically, there are four quadrants: distribution is the first. Look at where the brokers are going and defining their value proposition and what they’re looking to do to cement their foothold as they invest heavily in data analytics. They’re looking to be solution providers, combined with an effort to strengthen their own market position through building broker facilities and consortiums. Distribution is a big challenge as we look to see how we fit in the equation.
Another tactical challenge is the commoditisation of rating models. Being able to differentiate using the models is a challenge. A third one is arbitrage in a soft cycle. Clearly that’s a tool that a lot of people engage, insurer to reinsurer and then reinsurer to reinsurer.
Finally, transparency. In a world of oversupply, transparency with the underlying risk may suffer.
James Few: There’s a lot of focus on supply, but there’s a real challenge for all of us to try and grow demand, which means innovative ways to increase the attractiveness of our products. Maybe it’s providing private market solutions rather than government solutions, or it’s about new products or regions, none of which is easy. This supply problem is a challenge; if we can grow demand that would partially help.
The regulatory burden is also quite significant nowadays. It’s not just the amount of time it takes up that’s a distraction. It’s also the cost, which is quite considerable, particularly for the multi-platform, multi- jurisdiction companies many of us run.
Leila Madeiros: If you look at the evolving parallel group regimes that are going to be rolled out under Solvency II, and the NAIC qualified jurisdiction regime, all of these put additional pressure on expense ratios because the cost burden is significant in the sense that it’s yet to be determined what the benefit to policy holder protection will be. What we are witnessing is something like a paradox.
The territorial scope of these regimes—50 state jurisdictions in the case of the NAIC, and EU and EEA member states in the case of Solvency II—does give the sense that we are moving towards shared jurisdictions. Yet for jurisdictions like Bermuda that lie outside of these shared zones, we encounter interconnected business and regulatory challenges.
On the one hand, there’s a movement towards regional uniformity and predictability, and on the other, one towards barriers to market. In some
13 Bermuda Finance | 2014
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