Is the Hard (re)insurance market approaching?
The 2017 Hurricane season has had quite an impact on earnings and losses to the insurance industry. We are seeing many companies post capital size losses to Q3, not just earnings losses. This has a significant impact on the market. Which begs the question is the hard (re)insurance market approaching?
At every industry conference there is constant talk, pontification, prognostication, etc. Most people are trying to talk their books, brokers advocating for their clients highlighting the abundant capacity and risk bearers pointing to losses and trying to push back on the perennial soft market renewal.
But to the question about the market hardening…
My guess is yes, but time will tell. These are a few reasons why I think the markets will harden.
Board of Directors
The BOD of most publicly traded or private firms have to keep investors happy. 2017 will not go down as a great year for investors with some firms losing 7.5% to 15% of capital.
How secure is the BOD seat if you approve no action to the renewal plan? or 2018 budget?
Budgets
Senior management and executive teams will have to revisit their 2018 budgets and planning to make sure they meet their cost of capital. Otherwise investors will demand capital back, or other strategic decisions…for example we might see increased M&A discussions – once the dust settles.
Cost of Capital
Which depending on retro markets, equity investors, other capital providers to the industry, will all probably rise.
The question of how accurate CAT models are as well as track record of risk bearers, will always cause push back. As an industry investor, if XYZ company was barely hitting my cost of capital before these events, I’m definitely going to want to see higher returns to pay for bad years like 2017.
Reinsurance
There is a lot of uncertainty in the reinsurance market right now, after prolonged periods of soft market, surplus capital and alternative capital competition. What will traditional reinsurers do at this point? Increased Reinsurance costs get passed down through the value chain to insurance customers. Same with Retro capital passed down to reinsurers.
Market Cycle – Insurance Clock
According to the market cycle clock, by Paul Ingrey there are a few noticeable times to pay attention to.
1:OO – PRICING STARTS TO DROP
2:OO – COMPANIES COMPETE TO INCREASE MARKET SHARE
3:00 – PRICES FALL DRAMATlCALLY
4:00 – PROFlTS SUDE
5:00 – RESULTS HORRIBLE
6:00 – PRICING CANNOT GO LOWER
7:OO – A. M. BEST WRITES THIS DECADE’S “LETTER OF CONCERN’
8:00 – CRUNCH
9:00 – PRICES UP SHARPLY
10:00 – CAPACITY BECOMES EXPENSIVE
11:OO – ALL COMPANIES FLOURISH
12:OO – EUPHORIA
1:00 – PRICING STARTS TO DROP
It feels like we have been at 6 o’clock for quite some time. These recent events might give rise to move the dial to 7/8.
Luckily we haven’t seen rapid inflation or insolvencies, but again lets wait for it.
Thoughts
There is no denying the growth in alternative capital over the last decade has changed the clock and traditional hard/soft market cycle.
However, these losses combined with low interest rate environment, there is still uncertainty about what this market will do in the face of losses. Will they pack up and go (very unlikely)? Will they decrease allocation to insurance assets (possibly)? Will they double down or new investors take this opportunity to get into this alternative asset class (uncertain)?
Traditional insurers and reinsurance firms will most likely see a hardening of the market. Primary companies were exposed to a large amount of net losses, sometimes not triggering their CAT treaties. Reinsurance companies were exposed to CAT losses. It sounds like many are going to be pushing to improve their portfolios with some time of rate action.
The questions remains Is the Hard (re)insurance market approaching? If so, for how long?
This is when underwriters will prove their skills and value. Exciting times.
