‘Shock event’ required to reverse downward reinsurance market trend

A $25 billion loss would stop the global reinsurance market’s downward pricing trend, but an $82 billion loss would be required to turn the market, according to a panel of experts on an AM Best webinar.
During the webinar, ‘State of the Global Reinsurance Market: Where the Hot Spots Are and Who’s in Them?’ a panel of global reinsurance experts said that the reinsurance market has the will to stop the downward pricing trend, but not the means.
Brian Ingle, an executive vice president at Willis Re, suggested should a “Hurricane Andrew-type event” hit the Florida coast, causing $25 billion in insured losses, “we think that would stop the downward trend, but it wouldn’t turn [the soft market hard].”
Bryon Ehrhart, Aon Benfield’s chairman of analytics and investment banking, said that the next major event will have to hit both insurers and reinsurers. He noted a 115% combined ratio for the insurance industry was required in each of the three most recent market turns.
“To make [2009’s] 101% a 115% it would take an $82 billion hurricane, which is a 1-in-150 year event. It would take a $72 billion earthquake, which is roughly a 1-in-250 year event,” Ehrhart said.
“We do feel that some of the ingredients are there but it’s going to take a significant event to drive it. There’s not going to be enough momentum from declining returns to turn the market.”
Christopher Klein, Guy Carpenter’s director of reinsurance market management, suggested instead of focusing on the dollar sum, to think of a shock or surprise event that would affect the market.
He pointed to 9/11 and Hurricane Katrina. Both were large losses, but more importantly both events exposed deficiencies in the ways in which underwriters understood the accumulation of risks they had had on their books, Klein said.
“I still recall talking to Bermuda reinsurers shortly after Katrina and they were scratching their heads, trying to work out how they managed to lose a quarter of their surplus.”
Stephen Hitchcock, managing director of Lockton Re, agreed. He added that recently the industry has experienced a high frequency of small- and medium-sized events in areas with high take-up of insurance and reinsurance.
“If this [frequency of] activity carries on that will change [the market].”