Reinsurers were “lucky” not to have been hit with major cat losses in 2007, says Peter Middleton

“To some extent cat bonds have been a bit gimmicky,” said Peter Middleton, managing director at Markel, during an interview with Global Reinsurance in Baden Baden, Germany.

He said non-traditional reinsurance was still on the sidelines and issues such as basis risk and the frictional costs of setting up would prove a challenge.

The issuance of industry loss warranties tends to taper off when the conventional reinsurance market is reasonably priced, he explained.

“To some extent cat bonds have been a bit gimmicky

Peter Middleton

A number of sidecars have also been closed down in 2007. Many of these special purpose vehicles were set up in Bermuda to provide retrocessional capacity. In the months following Hurricane Katrina there was a capacity crunch for traditional retrocession.

Now, much of that traditional capacity has returned and there are even new players operating in the sector. New laws in Florida also helped to accelerate the early closure of the “disposable” sidecars, said Middleton.

The subprime market collapse and resulting credit crunch could sort out overcapacity in the Bermuda market, predicted Middleton.

“It would be nice for the rest of us to think that subprime could have an impact on Bermuda

Peter Middleton

“It would be nice for the rest of us to think that subprime could have an impact on Bermuda,” he said. “The people investing in Bermuda start-ups might want a bit of their money back. That’s not a bad thing.”

Pricing in the run-up to the 1 January renewals will soften slightly – by between 0%-5%. Middleton said rates would be most likely to hold up better across the European storm zone.

He pointed out that although there had not been any significant catastrophe losses in 2007, there had been a number of near misses including two category 5 hurricanes which made landfall on the sparsely populated Mexican coastline.

“2007 had a lot of catastrophe activity without costing reinsurers too much money,” he said. “It’s not going to arrest the general direction of the market but should be taken as a warning.”