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Willis' Martin Sullivan Sees Reinsurance Market Fragmenting into Sub-Cycles

Source: Willis

Posted on 12 Sep 2011

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In the absence of a massive global event, such as another financial crisis combined with significant natural catastrophe losses, the overall soft reinsurance market that has persisted since 2004 could become the norm for the foreseeable future, with hardening occurring along geographical and business lines rather than across the broader market, according to a senior executive from Willis Group Holdings plc, the global insurance broker.

In his keynote speech at the PwC breakfast briefing at the annual Monte Carlo Reinsurance Rendez-vous today, Martin Sullivan, Deputy Chairman of Willis Group and CEO of Willis Global Solutions, argued that reinsurers’ total available capital may no longer be the only driver of reinsurance market softening or hardening.

Sullivan said that the previous three hard markets have been driven by a reduction of industry capitalisation and short-term difficulty in rebuilding and accessing new capital. Today, these historic across-the-board hard market cycles are unlikely to be replicated, he said, due to advances in actuarial and natural catastrophe modeling techniques attracting longer-term capital market investors.

In his speech entitled “Capital Availability, Modeling Advances, and Soft markets: A Broker’s View”, Sullivan warned that if reinsurers face a perfect storm of, for example, inflation and sovereign debt default, “all bets are off” and a global hard market would likely ensue. “Barring this type of financial Armageddon, the current levels of overcapitalisation may be reduced by losses and poor investment returns, but that should not return us to the bouts of capital starvation that drove market behaviour in some of the earlier hard markets.”

Focusing on the impact of this change in historic market cycle patterns on industry stakeholders, Sullivan said that insurers and reinsurers will have to adjust to a “new reality in which outsized underwriting returns will only be available on a localised basis, and even then possibly only for short durations”. Regulators, for their part, may focus on the possibility that the convergence of modeling techniques could lead to systemic risk.

Sullivan concluded: “While underwriting excellence remains key, more sustainable competitive advantages need to be developed by the reinsurance industry through operational excellence and reduction of costs.”

David Law, global insurance leader at PwC, said: “The industry needs to recognise that the drivers contributing to a hard market are changing. Simply managing the cycle will no longer produce adequate returns for investors or provide meaningful value for customers. This evolving landscape should be a catalyst for the industry to reinvent itself and demonstrate the value of alternative risk-management solutions. Reinsurers need sustainable strategies, built on differentiation and stakeholder needs, to help the sector demonstrate its value potential to the capital markets.

“The winners are likely to be those companies that are agile and innovative, have embedded risk-management practices within their business and are obtaining maximum value from diversification.”