McGavick: underinsurance shames industry
Insurers should be ashamed every time a major event results in a large gap between economic losses and insured losses, according to Mike McGavick.
Mr McGavick, chief executive officer of Bermudian-based XL Catlin, said one take from Hurricane Maria and its impact on Puerto Rico was the “massive and horrible uninsured element”.
“Every time we hear of a large storm, especially in a developed economy, when there's a huge gap between the economic value and the insured value, we should all be ashamed,” Mr McGavick said.
“We have so much more we can offer society, if we got off our butts, worked with these governments and got the job done. And a lot of people would be a lot of better off.”
Mr McGavick was speaking on a CEO panel at the S&P/PwC Bermuda Reinsurance conference at the Hamilton Princess yesterday, alongside Kevin O'Donnell, CEO of RenaissanceRe, Marc Grandisson, chief operating officer of Arch Capital Group, and moderator Taoufik Gharib, senior director of S&P Global Ratings.
Mr McGavick also expected rates to rebound after the large insured catastrophe losses of the third quarter, estimated to be as much as $100 billion.
“The process of underwriting that went something like ‘how much less than the 10 per cent off that I requested can I get?' is over,” Mr McGavick said.
“Underwriters are awake to the fact that they were selling their product for less than its real cost. And once they're awake to that fact, then they don't go back — at least not for a while.”
Mr McGavick said the market was going through a systemic shift in which the peaks and troughs which used to characterise the reinsurance cycle were being smoothed out by the alternative capital.
“This is the inflection point at which we start working towards a much more sustainable price,” he said. “This is a period of education for underwriters, for brokers, for clients.
“Those days are gone, don't expect it to go ripping back down, we're going to try to be more precise over time, or else the market makes no sense any longer and capital will be withdrawn.”
He expected alternative capital's role in the market to grow over time and that more of the capital “waiting in the wings would come onto the dancefloor” to take advantage of more attractive returns.
Traditional reinsurers who can find more places to put capital to work will be able to take advantage of alternative capital's availability, Mr McGavick added.
RenRe's Mr O'Donnell agreed that rates needed to rise.
“I believe the market is changing and we're going to see a secular shift towards efficiency and more stable margins,” he said.
Market cycles would look different and the industry needed to get back to sustainable pricing that had been lacking.
Mr O'Donnell said it was wrong to think of alternative capital as “monolithic”, adding that almost all the third-party capital RenaissanceRe's attracted in 2006 was from hedge funds, whereas today it had none from that source. All capital had different appetites, he added.
“The conversations we are having with capital at this point is contingent on rate change,” Mr O'Donnell said. “The question is now: is third-party capital patient or is it cheap?”
The answer, from what he is seeing now, is that the market is more patient than cheap, Mr O'Donnell said, which would influence how reinsurers structured vehicles going forward.
“Broadly, this is not a test for third-party capital — cat bonds have not been materially impacted, some of the more diversified ones have not been impacted, but if this had been Irma coming in on the east coast of Florida instead of the west — this would have been a test for third-party capital,” the RenRe CEO said.
Arch's Mr Grandisson said rate increases were long overdue and the upward pressure could spread across lines of business over time.
“There's no denying that there's fatigue in the industry,” Mr Grandisson said. “There have been anaemic returns and I believe there's a recognition that something has to change, even among buyers.”
While he believed that rate rises were likely in loss-affected lines, with spillover into other lines over time, he added, “the big question is whether it will be enough to be sustainable”.