The hectic conference season ahead of the January 1 2012 reinsurance renewals is now in full swing. With it comes the usual overload of gossip and speculation, as reinsurers try to talk the market up and brokers and buyers try just as hard to push for rate cuts.
As ever, conversation at the Monte Carlo Rendez-Vous – the traditional start of European reinsurance renewals discussions, which took place in September – was dominated by pricing. The issue was whether the market would finally turn after a barrage of punishing losses so far this year in Japan, New Zealand, Australia and the US, which combined have caused an estimated $70bn of insured losses.
Despite tough talk from some, the answer is most likely: not yet.
Unsurprisingly, brokers tried their best to talk down rates. For example, Nick Frankland, Guy Carpenter’s CEO for EMEA operations, predicted European prices would be flat to down at the January 1 2012 renewals.
But the surest sign that a broad increase in price is not in the offing came from reinsurers. Not normally shy of trying to talk up markets, reinsurers did not sound overly convinced that big price increases were in the offing. Even those expecting price increases admitted that price changes were likely to be modest.
While all this speculation is fun – and certainly stops us journalists from falling short of copy – it may also signal a fundamental weakness of the market. As Pat Ryan says in a piece on page 16 of this issue, operating in a soft market is far more the norm for the global insurance and reinsurance industry than the brief golden periods of hard pricing. Yet many insurers and reinsurers seem to operate as if it is the way around.
The industry is over-reliant on vainly waiting for a turn in price. This stodgy market may be around for a while, if no large catastrophes hit in the rest of the year. Get used to it.
The industry’s attitude does not help with how it is viewed by those outside the industry. A recent report from PWC even went as far as claiming that the stock market had lost confidence in the traditional, diversified reinsurance model. The consulting firm claimed that reinsurers need to radically re-think their strategies to improve shareholder returns.
Reinsurers and investors are not capitalising on the potential attractiveness of the sector as a source of uncorrelated cash flows, leading to an undervaluation of the industry, PWC says.
PWC believes companies will need to move away from diversified business models to attract greater capital markets interest and improve shareholder returns, amid the current low-rate environment.
In its report, Daring to be different, PWC shows that the vast majority – 89% – of the main listed reinsurers are trading at below book value. The research also reveals that absolute returns offer little comfort – an investment in a basket of reinsurance stocks at the start of 2004 would have generated virtually zero total return to shareholders, with very little difference between European and US/Bermuda reinsurers.
“The current environment of high macro uncertainty should make reinsurance stocks an attractive option as sector earnings are, for the most part, uncorrelated to other asset classes and fluctuations in macroeconomic variables,” PWC says. “Yet, capital market valuations of listed reinsurers continue to disappoint.”
James Quin, European insurance market reporting leader at PWC, said: “Clearly, the benefits of diversification and the distinction between reinsurers and other financial services companies are far from obvious to the capital markets.”
With many reinsurers pursuing a diversification strategy, this leaves investors with little option but to differentiate between companies purely on a relative yield basis. The report suggests reinsurance companies’ search for diversification is often viewed by investors as undermining accountability and as a justification for growth and “mission creep” over returning cash to shareholders.
Achim Bauer, insurance strategy leader at PWC, said reinsurers’ strategies have too often been built on diversification as an excuse to be everything to everybody and the result is a commoditised and opaque industry.
“Reinsurance has become a mere cost to insurance buyers, rather than a valuable risk management tool,” he said.
Leading reinsurers should instead try to stand out from the crowd through strong leadership, scale, risk insight and partnership. “They need to look beyond ‘managing the cycle’ to anticipating longer term challenges,” Bauer said.
Some CEOs are also calling for insurers and reinsurers to take more control of their destiny. Kevin Kelley, CEO of Bermudian insurer Ironshore, commented at a Reactions conference in September that leaders could end up out of a job.
“For us to sit back and blame others for our own results I think is very dangerous, particularly for those companies that are in the public domain, because results as we all know are not good,” said Kelley. “In my view unless management takes responsibility and starts to change their behaviour, shareholders ultimately will change management. So it is incumbent on those of us who lead companies to take a position.”
Those who aren’t looking beyond managing the cycle, however, can take heart in MarketScout’s latest figures, which said US property/casualty rates were flat on average in September. The online exchange believes this means the soft market is drawing to a close.
Richard Kerr, CEO of MarketScout, commented: “Brokers and insurers shouldn’t pop the champagne just yet, but there is light at the end of the soft market tunnel. Financial metrics may not necessarily call for pricing adjustments in all areas, but after six-and-a-half years, the market may turn anyway.”