IQ Summer 2016

IQ Summer 2016When I started doing this in 2010, global specialty (re)insurers had a slightly imbalanced business model.

It involved a measure of diversification by line of business and geography, but its cornerstone was the assumption of catastrophe reinsurance risk.

Property cat was a relatively small part of the overall premium base of Bermuda, London and the global reinsurers, but it made a disproportionate contribution to the bottom line.

The cat cross-subsidy was relatively little spoken about in interviews and from conference platforms, but everyone in the industry knew where the real money was coming from. And it wasn’t aviation insurance or marine treaty.

Industry returns were driven out of the cat book in an era of zero interest rates. That needed to be balanced by some longer-tail exposures and some specialty lines, but these were very much secondary.

Structural trends, overlaid by cyclical pressures, have destroyed that business model. Alternative capital has sucked the excess returns out of the cat space and juicy bottom layers have been retained by data-savvy cedants more comfortable running a bigger net cat bet.

And now we are in a period of difficult adaptation in which beleaguered industry participants flail around for a new, more defensive model.

There are a number of different possible answers to the question that (re)insurers are grappling with. Transformative M&A. Third-party funds management. Brutal efficiency drives. Technology.

Insofar as there is an industry orthodoxy at present it centres on the virtues of diversification.

If there is no golden class of business, then (re)insurers must find ways to lever their balance sheets as much as possible to squeeze out a point or two of underwriting margin here or there on a well-worked capital base.

So, leaven reinsurance exposures with insurance, property with casualty, casualty with speciality. Offset US exposures with Japanese risks, and stretch the capital supporting European wind to support Australasian wildfire.

Or, even, step outside of the P&C space altogether and look to mortgage reinsurance.

The burgeoning mortgage reinsurance space potentially offers reinsurers – fearful of ebbing returns and pressured top lines – a life line in the form of new and diversifying demand.

Aon Benfield has said that $3.5bn of limit was purchased last year by US government-sponsored entities Freddie Mac and Fannie Mae. It has also projected that each could buy $3bn-$4bn of limit by 2017 or 2018. Additional purchases are also expected from the private mortgage insurers.

The numbers are relatively small at this stage in the context of P&C exposures, but there is scope for further growth and this admittedly slightly exotic food is sustenance for a starving market.

The adventurer in me says that they should grasp it with both hands, working at the inception of a new (or at least re-awakened) market to fashion something that is profitable and sustainable for both cedant and reinsurer.

And the early signs are that that is exactly what they are doing. The diversification that is carrying reinsurers into insurance and cat writers into casualty, is drawing P&C players into the mortgage space in droves, with 25 carriers already wielding lines and another 10 gearing up to do so.

Perhaps in five years’ time it will have become just another staple part of a specialty (re)insurer’s business, alongside a Florida cat account, a global surety book and a London market energy portfolio. 

To read the Summer 2016 issue of IQ, please click here.

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