Catastrophes, Capital and Competition: Talking Points From Down Under
I recently participated in a stimulating roundtable event organised in Sydney by the publication Asia Insurance Review in collaboration with the law firm Clyde & Co. I joined a dozen other senior insurance industry executives to exchange views on key issues for the Australian insurance market.
Perhaps not surprisingly in view of recent events, Nat Cat Risk was high on the agenda. Asia and Australia received more than their fair share of cat losses in 2010 and 2011. There were a few key topics of discussion among the group:
- More can be done to improve disaster mitigation and readiness. There is an urgent need for governments around the world to be more proactive around mitigation and risk management in exposed areas. Without this, the opportunity for the (re)insurance industry to deliver financial stability at affordable prices will be inevitably limited. Insurance is about covering uncertainty. Looking at how frequently events occur in certain areas, one would question whether uncertainty still exists.
- Recent events have highlighted the low insurance penetration remaining in most countries and the significant gap between economic and insured losses. With the growth in population worldwide and the seemingly irreversible trend towards urbanisation (more and more people living in urban areas), Values-At-Risk will continue to grow.
- The frequency of extreme weather events is increasing. If we couple this increase with the constant growth in exposures, the insurance and reinsurance industry will have to cope with ever increasing losses. There is a lot of talk about how much capital has entered our industry recently, but I sometimes feel we lose sight of how much larger the exposures have become, especially looking at the tail of the distribution.
- There is abundant reinsurance capital, and competition is heightened by capital markets investors’ growing appetite for insurance-linked securities. While part of the current oversupply of capacity in the reinsurance industry is due to interest rates being kept artificially low, the capital markets’ taste for better returns than they could find anywhere else presents a longer-term movement. This is creating an interesting dynamic, with reinsurers being forced to re-evaluate their value propositions in order to ensure their long-term relevance. Being like everyone else is no longer a sufficient strategy and the increased activity on the mergers and acquisitions front is a clear sign of that.
What will be very interesting to see is how resilient this new capital is once a couple of large losses occur, especially if they are complex events. The recent experience with the New Zealand earthquakes has shown Cat business is not necessarily short-tail and this may not coincide with some of these new investors’ time horizons.
Reinsurance is a long-term game and cannot be played with capacity that has an expiry date attached. I believe that the value of long-term commitment to the business will continue to represent a compelling point of differentiation - as long as it is supported by a relevant value proposition.
At Gen Re we are proud to say that we have no exit strategy. Talk to us today to find out how we can support your business, now and in the future.