According to AM Best’s report “The Capital Challenge: Reinsurance Capacity Overshadows Market” reinsurers should continue to consider the implications of convergence capital on their reputations. Should the new capital prove skittish—making a swift departure from the market after a large loss—traditional underwriters may be left to face unhappy clients.
The report reads: “the traditional market has long prided itself on enduring, deep client relationships. Should this additional source of capacity decide to exit quickly the underwriter might have some explaining to do! Reinsurers have seriously contemplated this reputational risk and should continue to do so. As is the case with SAC Re, a company’s affliction can greatly influence its destiny.”
AM Best went on to say that while some believe hedge funds to be the biggest influence on the reinsurance markets, it is likely that pension funds wield more influence. These funds, the rating agency argues, have by an large taken their time in entering the market, making it a point to learn the ropes before sinking their “vast” amount of capital into the reinsurance space. AM Best believes the funds to be long-term investors.
The report goes on to say that prudent cycle management remains the most important factor to success in the current market environment, which AM Best describes as “solid but unremarkable.” The importance of cycle management, according the report, “cannot be overemphasized.”
AM Best, report, convergence capital, ILS, reputation risk