Executives expect reinsurance rates to climb
Investors will be lining up to put capital into insurance-linked securities after a year of huge catastrophe losses that will prompt an increase in rates.
That is the view of Richard Lowther, chief operating officer of Bermudian-based Hiscox Re Insurance Linked Strategies, who expects a significant market response to the massive insured losses inflicted by hurricanes Harvey, Irma and Maria.
Mr Lowther, speaking on a panel at last week’s World Alternative Investment Summit, believes the third-quarter events will spark an upturn in the reinsurance market.
“You can’t destroy that much capital in a market and not have an appropriate market response,” Mr Lowther told delegates at the Fairmont Southampton on Friday.
“There are a lot of people with cash on the sidelines who have been waiting for a year like this to get into the ILS market.
“But there are high barriers to entry — it’s not that easy to get the capital to the risk.”
He said he expected to see investors “jostling at the gate” coming up to January 1 — a traditional date for many reinsurance contract renewals.
Mr Lowther said the combination of substantial insured losses and uncertainty about both the developing claims process and the unusual nature of Harvey — in particular how such a system managed to produce “biblical” rainfall — were leading to many viewing their risk exposures differently.
Brenton Slade, chief operating officer of Bermudian-based Horseshoe Group, was also on the panel. He was also bullish about the prospects for the reinsurance market, but to a lesser degree that Mr Lowther.
“Ultimately, we don’t really know yet whether it’s a true inflection point or not,” Mr Slade said.
He added that the reinsurance industry had traditionally been used to a “boom-and-bust cycle”, but that these days the impact of ILS capital meant the peaks and troughs of the market were less pronounced that they had been in the 1990s and early 2000s.
“Large catastrophe losses lead to capacity shortfalls, business needs to continue and so something has to shore up that hole in the balance sheet,” Mr Slade said.
Mr Lowther pointed out that traditional reinsurers had “a lot more diversity of funding for their balance sheets” with the capital markets in the form of ILS such as catastrophe bonds taking some of the strain.
Both executives agreed that there were good reasons behind the attraction of Bermuda as a home for reinsurance capital.
Mr Slade pointed out that there was only one regulator — the Bermuda Monetary Authority — as opposed to having to deal with an insurance regulator in every state in the US.
“In Bermuda, we have a reliable court system and light-tough regulation and capital can be put to work quickly in a trustworthy jurisdiction,” Mr Slade said.
“In that way, it’s different from almost anywhere else in the world. That is why the capital has flowed here.”
Mr Lowther said Hiscox Re based half of its staff in London and half in Bermuda in recognition of Bermuda’s status as one of the world’s major reinsurance markets.
“Speed to market is very important,” Mr Lowther said. “I think we’ve had a pretty significant dislocation in the market, but we may not know until November or December, so we will need to be ready to take advantage of it.”