Depressed returns will continue to bite in 2017, say reinsurance execs in year-in-review
The year 2016 may well be remembered for the depressed returns posted by many re/insurers as they continued to grapple with low investment returns and the soft market—and 2017 could bring more of the same if there is no change in the market.
That was the sentiment of a number of Bermuda executives asked by Bermuda:Re+ILS to describe what they felt were the most important events of 2016 and the pertinent topics of 2017. The full range of comments from these executives can be read here.
Julia Henderson, senior vice president at Brit Insurance, said that there had been a sea-change in the returns that investors expect and this is having serious consequences for the re/insurance industry.
‘Beyond the global sociopolitical paradigm shifts, the biggest development in 2016 which specifically impacts re/insurance is the comfort level that has taken hold in the depressed return environment. As has been widely reported, once pension funds decide on an allocation to an asset class, permanently depressed returns follow and our industry has become an asset class to these behemoth pension funds,’ Henderson said.
‘The yardstick of yesteryear has (finally) been shed, and the reality of this, along with the realisation of the ease of recapitalisation, is that portfolio managers across the board are now comfortable with 400 to 500 bps spread returns.’
Kathleen Reardon, CEO of Hamilton Re, added: ‘There was a rise in the frequency of large, but not catastrophic, claims during 2016. This helped markets maintain a vibrant abundance of capital that supported depressed market conditions. A factor in establishing a ‘new normal’, the challenge and the opportunity now is to create partnerships that enable the innovative and creative use of this capital.’
Damien Smith, director of underwriting at Hiscox Re, added that he believes the industry is rapidly reaching a tipping point.
‘Market results deteriorated significantly over the first half of the year despite continuing benign cat activity suggesting we are at a tipping point,’ he said. ‘Property-catastrophe rates dropping below technical adequacy in several international territories have also been seen in 2016.’
Smith added: ‘With continuing softening at 2016 year-end, results for some could deteriorate and several re/insurers are likely to make a loss.
‘The imperative for reinsurers to bring additional value and differentiate in the eyes of their clients will continue in a tough trading environment.
‘Macroeconomic trends such as rising interest rates could distract from the adequacy of pure underwriting returns and impact insurance-linked securities (ILS) strategies; currency fluctuations will impact re/insurer valuations and the potential for M&A, as well as reinsurer appetite for locally denominated overseas exposures.’
Senior executives from companies including PwC, Brit, the ABIR, Hamilton Re, Hiscox Re and the Bermuda Monetary Authority participated in the examination of 2016 and look forward to 2017. To read the full transcript of their thoughts and comments, please click here.
