Greater focus on underwriting discipline and new perils

The industry will need to pay attention to price discipline in response to the influx of new convergence capital, and as it struggles with troubled investment returns.

That was one of the major points to emerge from PwC and Standard & Poor's Chairman's panel at its eighth annual Bermuda (Re)insurance Conference held in Hamilton. Ed Noonan, chairman and CEO of Validus, said that the industry needs to balance a surge in the supply of capital that he described as “seemingly limitless”, with the need to continue to pursue business that offers attractive returns.

John Berger, chairman and CEO of Third Point Re added that the industry is having to contend with such an influx of capital that there are “people pressed up against the window looking to come in”. He said that this has, and will inevitably, place pressure on rates, adding that when future losses do occur there will be a realisation regarding who has priced their business too thinly.

Berger was however bullish about the industry's general health, arguing that it has never been in better shape in terms of its capital position. Such strength will be needed however as it faces a number of headwinds.

Macroeconomic conditions are placing considerable pressure on the industry's investment returns, said Don Kramer, chairman and CEO of ILS Capital Management, with prospects for any pep on returns unlikely for the near-future, particularly following action by the Fed and the ECB. He said conditions had however encouraged the formation of investment fund-backed entities willing to take more risks on the investment side. Further iterations appear likely.

Noonan cited weak economic growth as another headwind facing the sector, adding that “fundamental demand for our product is growing very slowly, if it is growing at all”. He said that this would prove a challenge to underwriting discipline.

All three panellist agreed that the industry must work to unlock new perils, with flood, terrorism and pandemic all areas of potential interest. Noonan said that the US flood programme was perhaps the best example of a risk that could comfortably find a home in the private market. “The US flood programme served its purpose, but it has largely outlived its purpose now”, said Noonan. He said that rather than wait for the federal government to introduce stepped rate increases and head towards rate adequacy over time, the industry should “step in and take the heat for rate rises itself”.

Noonan highlighted the potential for conventional terrorism risk to be brought into the private market. He said that the industry could in time get its arm around such exposures and while “assumptions will need to be made regarding frequency, which will inevitably encourage the industry to err on the side of caution”, there is great opportunity.

Noonan added that flood is a potentially good match with ILS-type structures. He said that with years of data to draw on, convergence capacity could be a “natural fit”. While in the case of terrorism, he said that potential correlation and the lack of data regarding the changing threat of terror attacks, makes such risks an unlikely bed-fellow for convergence capital. Kramer concurred that ILS investors are sensitive to additional volatility that terrorism risk might add to their portfolio.