Reinsurers need to build larger reserves of capital to protect them in the event that a major catastrophe presents them with losses on a scale they are not prepared for, according to Elyse Greenspan, director of equity research at Wells Fargo.
Speaking at the 2019 Bermuda Reinsurance Conference, hosted by S&P Global Ratings on November 6, she said: "Companies having excess capital is a good thing."
Sooner or later a major catastrophe will hit, and "excess capital is a sign that that company is going to be around the day after that earthquake or hurricane," she added.
Greenspan said reinsurers are "realising the major risk they have with their reserves," in light of the fact that investors aren't OK with what has brought companies to their knees in the past.
Jay Cohen, managing director at Bank of America Merrill Lynch Global Research, warned some companies went out of business in the late 1990s because of mismanagement of reserves. "We're not looking for precision. We're looking for major, major problems," he said.
Meanwhile Chad Stogel, vice president at Spectrum Asset Management, described reserve risk as "the number one killer of insurance companies."
Reinsurers have warned about the difficulties of building up their reserves in a climate of increasing legal costs and losses from liabilities and lawsuits, a trend known as "social inflation."
But Francois Morin, chief financial officer and treasurer at Arch Capital, said that while social inflation and other loss-cost trends are rearing their head and creating some issues, some companies have used the term social inflation a bit loosely.
"We're in the business of risk," he said. "Our job is to come up with a price for that risk."
In fact, most reinsurers enjoy robust capitalisation, according to S&P Global Ratings, helping to cushion the industry from the catastrophe risk and long-tail reserve risk that reinsurers assume in their underwriting.
But it warned its expectations of lower reserve releases relative to the past few years hasn't changed.
Elyse Greenspan, wells Fargo, Jay Cohen, Bank of America Merrill Lynch, Chad Stogel, Spectrum Asset Management, Francois Morin, Arch Capital