The reinsurance market is still cyclical and it hardens every time the industry’s return on equity (ROE) drops below 5%, argued Ulrich Wallin, Hannover Re chairman.
While the last sustained hard market was in the late 1990s, reinsurers will not face the same price falls in 2016, as rates remain at 2011 levels, Wallin suggested to the the Insider London event on Wednesday.
If the market was no longer cyclical, he argued that the industry should be a lot more afraid of rates dropping over the past few years.
“If that movement continues without the cyclical uptick then, of course, there is not that much of a rosy future for the reinsurance market,” said Wallin.
Between 2002 and 2013 the market saw a major loss event about one in every three years, he noted.
That began with the 9/11 terrorist attacks in 2001, said Wallin, followed by Atlantic hurricanes in 2005. The financial crisis hit in 2008-9 and then there were large Asia Pacific catastrophe losses in 2011.
“Each time that happened the average ROE of the industry fell below 5% and each time rates then increased,” said Wallin.
“That is the only reason we are still at a rating level that is comparable to 2011. So the volatility was really our friend and really helped us,” he added.
This begs the question of how quickly the industry’s aggregate ROE will continue to drop.
Wallin argued that markets do not turn because prices get too low to be sustainable, however much risk models, chief risk officers and compliance officers might argue against this.
He stressed that markets change, primarily because of shareholder pressure on management..
Secondly, Wallin argued markets change because the valuation of business needs to change, citing trends within the corporate bond market.
Wallin predicted that neither of these instigators will happen soon for reinsurers, and so the soft market will continue, “because we have just started the cheating phase”, he added.
The “cheating phase” is when companies use reserve releases to cover up bad results, noted Wallin.
“The market is cyclical. The longer the soft market continues, the sharper the reaction will be,” he added.