Steve Breen looks ahead to 2008 and shares his predictions on sidecars, derivatives and subprime.
In 2008 we are likely to see the end of the vast majority of sidecars barring no unforeseen mega-loss in the US. They have proved to be a good vehicle for short-term capital but have now served their purpose. It is highly likely that most of this type of capacity will leave the market in 2008.
The main reason for this is that rates are decreasing in property and property retro markets. Retro renewal rates are down by over 20% in some areas, a bigger reduction than the 10-15% anticipated drop in first tier property catastrophe renewals.
In the US, a reduction in wind specific retro prices could be more dramatic. Here we are likely to see reductions of over 20%. It is largely in response to historical high returns in these markets and more traditional capacity being available in the marketplace.
So what will replace sidecars? The catastrophe derivatives market is well-placed to replace the sidecars as it is much easier to understand, does not require complex set-up or an in-depth appreciation of the vagaries of the reinsurance market. Hopefully this will herald an end to the traditional “feast or famine” outlook of the catastrophe reinsurance industry.
“In 2008 we are likely to see the end of the vast majority of sidecars barring no unforeseen mega loss in the US
Stephen Breen Executive Vice President, Carvill.
The arrival of exchange platforms will bring more consistency in pricing and product. Undoubtedly, this will help make these products attractive to buyers and sellers and provide a spread to the variety of markets available. There is mounting interest in this area which can be capitalised on by weather and energy traders in particular in 2008.
The after effects of the subprime crisis will also provide another key reason for the growth in catastrophe-type derivatives. Diversification of portfolios will be an essential strategy in order to protect against the ripple effects of subprime.
We still haven’t seen the full extent of the subprime situation, but there are already reports that the losses will reach $300bn to $400bn worldwide. This compares with losses of around $75bn for all classes of business for Katrina. So even if these predictions prove to be exaggerated, we will see an effect on the reinsurance market in general.