Reinsurance was becoming a single-digit return game driven by structural changes around its capital base.
The likes of Zurich, AIG and Liberty were progressively retaining more risk at the expense of reinsurers as they looked to leverage their monster balance sheets.
PartnerRe’s board decided to quietly put the business up for sale after judging that it would be too expensive to build or buy an insurance business, which was mission critical for future success as a carrier.
The Bermudian reinsurer’s judgement of its prospects was so bearish that it decided that a sale to Axis, which would value one of the leading reinsurance franchises in the world at less than book value, was a better outcome than an independent future.
At this point the focus of the reinsurance world was directed towards model shift, as scale was pursued through consolidation, diversification was used to secure additional financial leverage, and fee income and additional market presence was sought through the development of third-party capital platforms.
Questions were asked about whether the potential of the ILS industry and its appetite for even volatile risk at mid-single digit returns meant the days of writing cat reinsurance on your own balance sheet might be over.
But since those dark days, the industry’s attention has moved on, and the real problems have emerged elsewhere.
Arguably, it is insurance pricing for large, complex, specialty risk that overshot more clearly on the downside than reinsurance.
The biggest carrier stories of the past 12 months have been the remediation of AIG’s book and the tactical and strategic efforts to reconstruct Lloyd’s.
Questions about industry structure and the reinsurance sector that felt urgent back in 2014 may no longer be top of mind, but I think they remain highly pertinent. And there is a question currently exercising the minds of managing agency CEOs that has interesting parallels for the reinsurance market.
With excessive expense a huge issue within Lloyd’s, the Corporation has indicated as part of Blueprint One that it will look to create a greater distinction between leaders and followers.
Leadership – which is likely to be officially accredited – will require product, underwriting and servicing capabilities. But the following market will be given the freedom to operate as true capacity providers, exempted from the need to employ expensive staff to carry out work that duplicates the efforts of the leader.
If the model works as intended, flexible structures will be developed that allow capital to follow expertise, with significant cost benefits accruing to the market.
Over the next five years, the Lloyd’s market looks set to bifurcate dramatically as a result.
Could the same thing happen within the reinsurance market?
Arguably, the leaders have already established themselves, with a push towards a global footprint, all-line expertise and major capacity.
And these companies are clearly highly expansive, with Swiss Re (+30 percent), Hannover (+20 percent) and Scor (+12 percent), showing they had major appetite to grow with even relatively limited upward rate momentum in Q2.
The question then becomes two-fold. First, will we see the development of a new generation of truly low-cost reinsurers that act as almost pure capacity providers?
Such companies would need to find ways to satisfy regulators and ratings agencies that they had sufficient oversight in place (perhaps harder to achieve outside the Lloyd’s ecosystem), while convincing investors they could make a return and create franchise value.
None of that is a mean feat, but it could perhaps be done with enough ingenuity.
And second, if they could establish themselves – or if some existing reinsurers evolved in this direction – would the middle tier of reinsurers be able to successfully compete against the full-service leaders and the ultra-low-cost followers?
One suspects that in such a scenario, the middleweights would find the squeeze far from comfortable.
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