Posted on 09 May 2013 by Neilson
The increased convergence between insurance, reinsurance and the capital markets and the increasingly aggressive moves from Warren Buffett's Berkshire Hathaway mean this year so far has been one of the most eventful in a long time, according to Pat Ryan, chairman and CEO of Ryan Specialty Group and founder of Aon. Ryan also predicts more reinsurers will follow Berkshire Hathaway into the commercial insurance market.
"I'm ready to look at the first four months of 2013 as being some of the biggest changes in my lifetime," Ryan told delegates at Reactions' Inaugural Midwest Re/Insurance Conference in Chicago on April 30.
The first reason for this, said Ryan, is that the convergence of capital markets, reinsurance and primary insurance is accelerating at a time when the reinsurance industry boasts record capacity.
"At the beginning of 2013 we had over $500bn of reinsurance capital that many people are saying is not being put to good work," said Ryan. "While we are all pondering that, the capital markets products and insurance entities are coming in and saying: ‘You don't have to buy traditional reinsurance, we can solve those problems for you with capital market solutions.'
"Now the buzz word is convergence. We've got capital markets, we've got reinsurance, we've got retail - they're all converging together. What does that mean? Is that a good thing? Is it a bad thing? Is there an opportunity there? What's going to happen? Will it create a hard market? No! It will in fact put pressure on the market because there are new entities and they've got to get in there and be in business."
Another reason Ryan believes this year has produced some of the biggest changes in his lifetime is the actions taken by Warren Buffett's Berkshire Hathaway. The two biggest moves by the firm are a deal to take 7.5% of all Aon's Lloyd's business announced in March. This was followed at the end of April by Berkshire Hathaway hiring four of AIG's top executives to launch an excess and surplus lines insurance business. Both of these actions have caused a stir.
Commenting on the effect of the Lloyd's deal, Ryan, whose firm owns Lloyd' s managing agency Jubilee, said: "When a huge company like Berkshire steps in and takes 7.5% of the risks that go into Aon [from Lloyd's], first of all that's a big compliment to Lloyd's because Berkshire's not operating that business - they're following. So they're saying: ‘We like them.' That's good but then you say, ‘OK it's a zero sum game, so if Berkshire gets 7.5, who loses 7.5?'
"As we all know there are varying sizes of Lloyd's investments and in our case we are relatively small so those people could get squeezed out of the market. Does the entrepreneurism, which is well over three hundred years old in London, get squeezed out? We don't know. We don't think so but some people think so."
Berkshire Hathaway's move into the primary commercial insurance market is the most prominent example of a trend that Ryan says has been coming. The firm has stated plans to establish an excess and surplus lines operation but some in the market believes it will look to set up an admitted carrier as well.
"You are seeing a shake-up. You're seeing the five hundred and something billion of reinsurance capacity being redeployed," he said Ryan. "We've been saying for three years that reinsurers, because they were getting lower returns, would be getting more competitive and because the capital markets gap is growing that they would be looking at participating lower and getting down and dirty."
He says Berkshire Hathaway's entry into the E&S market is a good thing.
"I think it's going to stimulate competition and stimulate creativity," said Ryan. "It's a catalyst for good. I always believed when I was at Aon that a strong Marsh was good for Aon and a strong Aon was good for Marsh. It's when people take it easy that they are not at their best but there are going to be people who are going to get run over because they're not going to be able to react and they're going to be left as dirt road. This is a fast paced industry that's just picked up its pace dramatically."
Speaking to Reactions on the sidelines of the conference, Ryan predicted that Berkshire Hathaway's "bold and quite aggressive move" to set up an excess and surplus lines insurer will lead other reinsurers to seek to move into commercial insurance.
"The world is somewhat shocked [by Berkshire Hathaway's move into primary commercial insurance] but I learned a long time ago any action - particularly bold action, which this is - stimulates a quick and also bold reaction. So with reinsurance capital not getting adequate returns and big chunk of it just put into primary markets. I think there will be a lot more of that. It is going to pick up in pace and you will find that $505bn getting in the game in a more aggressive way. The end result of this is you are going to have a hell of a lot of capital at different levels than traditionally. Overall I think that's a good thing."
Ryan said this increased competition coupled with the fact that insurance is representing a steeply declining percentage of GDP in the US means it is folly for insurers to wait for a hard market to produce returns. He related a story of talking to a private equity executive who said his strategy was to wait for a hard market.
"I said this is the worst business in the world to have waiting for a hard market as your strategy," said Ryan. "In my 40-plus years in this industry - each of which I have loved, some more than others - hard markets are shorter, they are narrower and they don't give you that much opportunity to correct the things of the past. So what I say is: ‘Let's look at the cards we are dealing with instead of saying what can happen if this comes our way or that comes our way.'"