Boom and bust mentality must change
Mark Watson, CEO of Argo said that as more capital pours into the market, the impact of medium and large scale catastrophic events will lose its punch and ability to move the market, allowing re/insurers to respond to true market conditions instead of waiting for a single event to move the market.
“I think as an industry we spend a lot of time talking about how much pricing will change depending on whether or not an event occurs,” Watson said. “You can’t run a business waiting for a big event to happen. The more different types or forms of capital come into the marketplace the more that boom and bust goes away and the market will reflect conditions.”
He continued: “That being said, if a $100 billion event happened it would change the marketplace, largely because a substantial amount of capital – and therefore underwriting capacity – would be withdrawn in a short enough period of time that things would change dramatically.
“If you saw a 200 basis point move in interest rates that would have the same impact. People are starting to talk about that more, but not as much. We’re in the middle of wind season. Once we get through that interest rates are more likely to have an impact on what happens with capital than a natural catastrophe.”
According to Watson, the capital influx could also change the way that Argo’s insurance arm purchases reinsurance. Argo is already involved with the convergence space and continues to shop for innovative forms.
Watson said: “A lot of smart people have already been talking about new structures. The reality is that we already have enough reinsurance capacity in the market today. If you’re coming to the table you have to find a way to differentiate yourself.
“To do that you must come up with something unique that the current market doesn’t offer or you must lower the price of your offering. As a buyer of reinsurance I don’t mind people coming to the table and lowering the price – that lowers my cost of capital. But it’s also nice to see something new come to the marketplace – a new and unique structure that could help us do a better job running our business and managing our capital.”
