May 17, 2007 by Canadian Underwriter
Traditional or legacy reinsurers, those who have been in the business a long time, are confronting a recent sea change in reinsurance philosophy, according to the senior vice president and chief agent in Canada for the Toa Reinsurance Company of America, David Wilmot.
I see a perfect storm, in which the industry, relying as it is on long-term, stable undwerwriting capacity, is now underpinned by short-term capital intent on short-term returns, Wilmot said at a May 2007 Property Casualty Underwriter Club (PCUC) luncheon in Toronto.
This is happening at the same time when there is an increase in demand for catastrophe capacity, Wilmot said. In addition, scientific data is suggesting an increase in the future of potentially seismic, catastrophic events.
Reinsurers who have provided capacity long-term, through good times and bad, may end up feeling mad as hell about a recent trend towards the short-term provision of capacity only when high profit margins can be accomplished, Wilmot said.
He said the very notion of reinsurance which is to spread atypical risk of exposure over several reinsurers over a long period of time has been challenged by a recent trend towards what Wilmot calls nave capacity.
According to Wilmot, nave capacity describes a situation in which reinsurers start up in the wake of major disasters to provide capacity, but they have short-term strategies to exit the market as soon as catastrophe losses mount and profit margins decline.
He notes that whereas traditional reinsurers expect returns of around 9% or 10%, fly-by-night capital providers have exit strategies to leave the insurance market if returns are less than 30%.
Wilmot said traditional reinsurers will eventually reach a point when they can no longer afford to have short-term capital providers so quickly entering and exiting the reinsurance marketplace when reliable, long-term capacity is necessary.