ILS
Has reinsurance had its day?
Hurricane Ian replaced the quiet optimism of RVS Monte Carlo with the visible anxiety of CIAB’s Insurance Leadership Forum. This led an ILS veteran to ask, half-joking, does the world need reinsurers?
“The absence of the reinsurance industry would cause a significant amount of hardship.”
Albert Benchimol, Axis Capital
“If there are any young Bermudians here, thinking about whether or not there’s going to be lots of career opportunities in reinsurance, the answer is absolutely yes, stick around,” Albert Benchimol, president and chief executive officer (CEO) of Axis Capital, told delegates at ILS Bermuda’s Convergence conference.
The event in Hamilton on October 12–14 was meant to be celebratory, given that ILS Bermuda is marking its 10th anniversary. The moderator of the panel discussion titled, “New dimensions: what is the future for reinsurers?”, kept the mood light with humour behind his first question.
“Does the world need reinsurers?” asked Andre Perez, chairman of Las Olas Holdings. Perez is the founder and former CEO of Horseshoe.
He picked Benchimol to go first.
“We just came back from CIAB and, given the anxiety in a lot of the meetings there, where the ceding companies were wondering if they were going to get reinsurance capacity, where brokers were wondering if there was going to be reinsurance capacity, I can tell you that the world believes we do need reinsurers,” Benchimol said.
“The reason we do is there is a set pattern for different roles along the risk value chain and the value of reinsurers is they help diversify volatility. And, at the end of the tail, they provide a significant amount of stability that helps the primary companies succeed and deliver their more stable results and, ultimately, they help the insureds on the front end. The absence of the reinsurance industry would cause a significant amount of hardship along the curve.”
But he conceded that the world doesn’t need the reinsurance industry of the last five or 10 years.
“It needs a new, more disciplined reinsurance industry that has more respect for its capital. And my hope is that we’re going to start to see that,” he said.
L-R: Peter Bell, Albert Benchimol, Kathleen Reardon, Mike Millette and Andre Perez.
Mike Millette, managing partner at Hudson Structured Capital Management, and formerly the most senior insurance-linked securities (ILS) professional at Goldman Sachs, said the insurance and reinsurance industries were becoming more distinct from the other.
“Increasingly, the two industries are becoming different and have different missions. The primary insurance industry is evolving and has a distinct mission. Customer experience around insurance is not great, it’s a problem, and what the best primary companies are seeking to do, is to provide an easier, more branded experience for customers that creates franchise value and to capitalise themselves based on that franchise value, and not based primarily on risk.
“So, the primary insurance industry increasingly becomes a corporate and consumer product industry with big branded global companies,” he said.
“Brand is important and you can see it here in Bermuda as you walk by AXA and Chubb which were once XL and ACE. They put those two companies together with two of the best hundred-year-old global brands to create increasingly insurance-focused companies.”
He went on: “The mission of reinsurers, as Albert said, is to be at the centre of the wholesale risk market but not to be all of the wholesale risk market. That will include investors in funds, investors in sidecars, other participants, who are pricing and bearing different vectors of volatility.”
There are two problems, he said.
“One of those is certainly discipline, but the other problem is that the wholesale risk market is working to try and find its way out of a dying paradigm. It needs to simply re-price, re-term, re-baseline its business. I think that’s going to be an exciting endeavour and so, instead of just being a conference where we all talk about how it’s not working, let’s get mission focused. Let’s create a wholesale risk market that lets big branded primary companies do what they need to do, which means that things have to be priced and termed properly.”
“We should expect a $20 billion landfalling hurricane every year,”
Kathleen Reardon, Hiscox Re & ILS
Kathleen Reardon, CEO of Hiscox Re & ILS, agreed.
“It’s structural: get back to discipline, make sure that all along the value chain the risk is being apportioned appropriately but, yes, reinsurers are needed,” she said, because insurance companies can’t function efficiently without them.
“Reinsurance is something you may have never heard of unless you’re in the industry, but the way that it keeps the wheels turning and the lights on in the economy is pretty interesting. It gives the insurance industry the space to step back and innovate, and the reinsurance community provides diversified large balance sheets to help keep the insurance industry solvent, to provide education on new product lines. Without reinsurance, the insurance model would have to change: limits change, price change, profile change. Reinsurance is absolutely necessary but I like the themes that are coming out from CIAB about discipline and some structural changes.”
Peter Bell, CEO of Everest Reinsurance Bermuda, said another way to think about the question Perez posed is that most reinsurers are “hybrid” in that they also have insurance entities.
“It’s about capital,” he said. “We’re providing capital to the insurance companies to help them work. Over the last few years, it’s got a little bit diverged and we haven’t been making as much money as we should have been, but we have been making money and most people have got a compound share increase. It’s just a question of making sure we price the product properly and also understand the product that we want to get out.
“What they were saying at CIAB was very different to Monte Carlo. Ian was the last nail in the coffin because Ian in itself is not a massive loss; it’s just off the back of Ukraine, COVID-19 and inflation, so whichever way you want to look at it, life has to change for a reinsurer and it is going to be back to basics: charge the right price and then make sure it’s what you actually want.”
Has Ian spoilt cat?
A question from the audience was: how do we convince investors that investing in cat is a good idea, given the increased frequency of high severity events?
“It’s a fair question,” Reardon said, “and I think there’s some element of ‘the boy who cried wolf’.”
She went on: “I do feel there’s a hesitancy for new capital to flow in at 1/1; there’s a wait-and-see approach: ‘show me the money and perhaps I’ll be there to step up and support you at the June/July renewals’. I really don’t blame those investors. The answer is, go back to your roots: what does the insurance company need to buy, what are they prepared to pay for it? The attachment points haven’t changed in a decade. Inflation wasn’t that large but, guess what? Now they need double to move us out of that earnings corridor and into the capital preservation area.”
Bell stressed that looking at past results wasn’t helpful.
“You can make money out of cat,” he said, “and it’s not as if the big companies have lost huge amounts. You might have bad years but over a long period money is being made and so it’s not a bad investment, it’s just the uncertainty at the moment. Climate change is so difficult to put something around. It’s not as if there’s more storms, it’s that they’re bigger at the moment. Is that going to continue? Maybe, maybe not, but it looks like it. As long as they’re small and you can price them at $20 billion—what’s $20 billion on an attachment point for the bigger US companies? It’s probably within their retention now anyway.”
Reardon continued: “We should expect a $20 billion landfalling hurricane every year and we need to make sure there’s enough money in the system to pay for it.”
She referred to recent data that showed Florida landfalling hurricanes since 1985 had the frequency of a 63 percent hit rate.
“I can’t imagine a hurricane hitting Florida and not getting to double digits,” she said. “So, raise the threshold and raise the expectations.”
Benchimol offered “another statistic” that “inception to date, the insurance industry has not made money on homeowners in Florida. Period”.
Millette interjected that “airlines didn’t make money for 70 years but people still thought that was an OK industry”. He added, jokingly, that the reason was the aviation industry is more glamorous than Florida homeowners.
Benchimol continued by listing the hurricanes since Andrew in 1992 and how, in their wake, reinsurers “gave up all the profits”.
“Andrew, Irma, Maria, Michael and Ian: you name them, there isn’t enough money.”
Millette said that Hurricane Irma in 2017 was “the devil”.
“The loss premium was so clearly unwarranted,” he said. “Not helping people get back on their feet, enriching all sorts of ‘Rent-seekers Associated’.”
He continued: “Back to the 1990s, because we had a substantial disruption and the market fell apart. What did we do in the 1990s that we don’t do today? Number one, extension spreads. I’ll say it: you have to pay to keep capital tied up; capital is not happy to be tied up without some sort of rent. And so, I think a return to extension spreads. Number two, let’s roadshow again. We used to roadshow every deal; I went on at least a hundred roadshows.”
They hadn’t been enjoyable, he added, but had once “saved a life”.
He told the audience about the team leader of a cedant for whom a roadshow had been so arduous that he felt sick and went to the hospital.
“It turned out, he had early-stage cancer and, because of that roadshow, he discovered earlier than he might have and got it cured. So, roadshows save lives!”
In the 1990s, it was “common knowledge”, he said, that “you did not reinsure 100 percent layers of primary companies; you did 90 or 85 percent and made them keep some up the side.”
He concluded: “So, we’ve become very misaligned because we have companies after a $5 million retention and 100 percent closing to the reinsurance industry and the companies become spectators. There were a lot of things that grew up in the mid-1990s that actually would have application today in reconstructing the market.”
Image Credit; Shutterstock.com / Photobank.kiev.ua
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