But some positive forces remain
The lack of a market-changing event so far in 2010, coupled with the economic environment following the financial crisis, could lead to a prolonged soft market in reinsurance, according to Henry Keeling, president and CEO of reinsurance broker Guy Carpenter’s international operations.
“The great recession was not a normal economic downturn and it is unlikely that recovery will effect a normal upturn,” he told the annual Baden-Baden Symposium, which Guy Carpenter has hosted for the second year running. “The global economic backdrop is challenged by disinflationary headwinds. Diminished pricing is leading to a challenged state for the global reinsurance market. Against this structural backdrop, global economic growth and reinsurance pricing may remain far weaker for far longer than normal.”
One of the factors driving weak pricing in the reinsurance market is overcapacity, fuelled by a surfeit of capital. Keeling said that according to Guy Carpenter estimates, the reinsurance industry had excess capital of around 8%, or $13bn, at the mid-point of 2010. “This is likely to have risen during the third quarter given the absence of major catastrophe losses,” Keeling said.
Despite the bleak outlook for reinsurance rates, Keeling said that a number of factors that could place upwards pressure on rates were waiting in the wings. In particular, reinsurers will not be able to rely so heavily on releases from prior-year reserves to prop up earnings. “Support from reserve releases appears to be waning, and our analysis of statutory returns from the US property/casualty industry already reveals modest reserve development for the 2008 accident year during 2009,” he said.
Further upwards pressures include low investment returns and the fact that regulatory change, particularly Solvency II, could increase the cost of capital.
Some reinsurers have been tackling the capital glut by returning money to shareholders through share buy-backs and special dividends. However. Keeling repeated the argument he made in his speech at this year’s Monte Carlo Rendez-Vous: that reinsurers should put excess capital to work rather than giving it back.
“At Guy Carpenter we see [returning capital to shareholders] as giving up a potential competitive advantage,” he said. “There are many ways insurers and reinsurers can deploy capital t grow their business from new technology to emerging risks and markets. Returning capital doesn’t create profitable growth and increased market share. Innovation, on the other hand, does.”