The reinsurance underwriting cycle: a simple supply and demand story
Richard Hartigan discusses the drivers of the reinsurance underwriting cycle and his theory on the next ‘market turning event’.
Reinsurers’ enthusiasm for a significant reversal in longstanding year-on-year rate decreases in the global catastrophe reinsurance market seems to be ebbing away. This is remarkable. By almost any metric 2017 was extraordinary.
The drivers of the reinsurance underwriting cycle are not well understood, but I hypothesise that it is one of the purest Supply / Demand stories ever written. A recent report by reinsurance broker JLT Re drove this home to me.
Demand for reinsurance is fairly static (rising only modestly year-on-year). Demand changes for reinsurance are usually modest, even after big events. Big events take capital out of the reinsurance market place (as losses are paid to insurers) leaving Supply of reinsurance temporarily constrained to the extent that new capital is not subsequently attracted by expected rate increases, but usually with modest change in Demand for reinsurance.
Absent a truly remarkable event (e.g. a colossal hurricane hitting the south east of the United States) Supply taken out of the reinsurance market place seems nowadays to only have a modest, and perhaps temporary, impact on rating. The most-likely reason is that Supply, attracted by expected rate increases, is ‘re-loaded’ much more quickly and from a considerably more diverse pool of sources than previously.
So what of Demand?
I have already hypothesised that Demand changes for reinsurance are usually modest, even after big events. Has there been a time when this wasn’t true? The terrorism events in September 2001 resulted in both severe Supply constraints and a Demand surge (for terrorism (re)insurance). Those (re)insurers that held their nerve and responded actively to the significant resulting rate increases were rewarded handsomely.
Terrorism was, and is, a risk that is difficult to model and aggregate. Do any modern examples of similar classes of business exist? I suggest that cyber is quite similar. Sooner or later there will be a colossal global cyber event. Like with terrorism in 2001 I expect that this will result in Supply constraints and a Demand surge (for cyber (re)insurance).
I hypothesise that nowadays it is only an event destabilising both Supply and Demand simultaneously that would merit the title ‘Market Turning Event’.
The ability of standard perils (earthquake, wind, fire) to significantly correct longstanding year-on-year rate decreases in the global catastrophe reinsurance market is perhaps lower now than it ever has been. The good news is that opportunities after a big event in non-standard perils / classes of business (e.g. cyber) likely still present future opportunities for handsome returns for reinsurers with steady nerves.
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