Even a big loss event is unlikely to turn market, but a floor is now in sight

A depletion of loss reserves in the industry will drive a slowdown in rate reductions and stabilisation in the US reinsurance market as it heads into 2017, Steven Levy, president of the reinsurance division, Munich Re, US, told PCI Today.

He said that the reinsurer has witnessed a significant moderation in rate decreases in the US reinsurance market in 2016 and he believes the market is now approaching its lowest point.

But he added that any further change in market conditions would be unlikely to be driven by a single loss event; rather, the industry’s increasingly depleted reserves may trigger a change.

“Terms and conditions have mostly been unchanged. It’s highly unlikely that one single event will change the current trajectory of rates unless it was something very large and, therefore, improbable,” Levy said. “What is much more likely to change the market is a reversal of the industry’s loss reserve situation.”

Levy does not believe the losses relating to Hurricane Matthew will have much impact on the market, also noting that the hurricane did not trigger any catastrophe bonds.

“While wind-exposed cat bonds, especially those that cover Florida only, traded well below par during the storm, they have since recovered to pre-Matthew levels, a strong indication that cat bond investors will not suffer losses from Matthew. As a consequence, we don’t expect an impact on the cat bond market,” he said.

Levy added that if other forms of risk transfer including industry loss warranties and collateralised reinsurance structures are included in this analysis, some losses from the hurricane are more likely. But such is the amply supply of alternative capacity, the consequences for the market will be minimal.

Levy also noted that he does not seen true ILS deals expanding much beyond the property-catastrophe peak zone markets.

“We believe that ILS will by and large stay in the property cat sphere and volumes will remain at close to current levels. This is not so much driven by cat bond risk spreads, which have been stagnating as well, but more by the standardised and inflexible structure of ILS,” he said.

In terms of other big talking points at PCI this year, Levy said the potential of big data will be the focus of many conversations.

“As with many other industries, the explosion of big data and the advancement of techniques to analyse big data will have a significant impact on re/insurers,” he said.

“For primary insurers, efficiencies will be increased via targeted marketing, improved claims handling, and automated underwriting/pricing. Primary insurers will increase their risk segmentation: understanding the average cost of an insured at an exposure-unit level.”

Levy said there are also opportunities for reinsurers to use big data to promote growth/retention, improve profitability, and introduce new products. He also pointed out that some primary carriers will need assistance in developing an analytics strategy and all carriers could benefit from reinsurance on new products such as usage-based solutions.

He stressed that reinsurers have the benefit of a broad view of the industry, which can be supplemented by use of big data relating to market and loss trends. However, as ceding companies gain a better understanding of their own risks, less reinsurance may also be needed.