Summit News: Traditional reinsurance back in vogue
THE increasing demand for traditional reinsurance is proof the ‘old ones are the best’, senior insurance executives have indicated.
The 21st Century has seen new forms of risk transfer, and subsequent new players, enter the reinsurance sector, with promises of a high returns to investors. But constraints in the financial markets are readdressing that balance.
Neil Maidment, chairman of the group underwriting committee at Beazley, told delegates at the ID Summit London: “Demand for traditional reinsurance is up because other forms of capital are scarce; the equity and debt markets are very challenging. Leverage has gone out of the hedge fund market. Year-end 2008 capital and surplus for US property/casualty reduced by $60bn from year end 2007. That is the equivalent of a major hit on the liability side of the balance sheet occurring on the asset side of the balance sheet.”
He continued: “Equally, supply is down. Some suppliers of capital have gone away. There was no new class of 2008 like the 2001 or 2005 start-ups. Also major players like Berkshire Hathaway have adjusted their risk appetite for 2009.”
David Watson (pictured), chief executive and president, XL Re Europe, believes there is now a greater emphasis on traditional reinsurance.
“Over the last 10 years traditional reinsurance and the capital markets have worked together and complemented each other, and I really don’t think anything has changed. The capital markets are still there, it’s just in a different form. Hedge funds have primarily disappeared because of liquidity — they are a short term bet,“ Watson noted, adding: “What has changed is buyers’ perception of reinsurance. It is now seen as second-tier capital, no-one wants to go to the capital markets to raise cash.”
Eric Paire, managing director, of Guy Carpenter, argued that alternative risk transfers, the likes of cat bonds and Industry Loss Warranties, are still around, albeit on a smaller scale. “We are not seeing the massive $400m issuances of the past. We are seeing activity in the $150m to $200m bracket which is a nice complement to the traditional reinsurance market,” he said.
Paire also pointed to a changing clients’ perspective of brokers.
“We still need the old traditional broking skills, but we are getting more requests from clients to perform analytical work to help them understand assets, capital implications and also to prove that this or that reinsurance programme is increasing the probability of paying dividends. We call it the trusting advisory role,” he added.
