AIG a safe ‘shelter’ for Validus Re: report by AM Best and Guy Carpenter

The global reinsurance market remains challenged by various market forces that will continue to shape the landscape over the near term. The recently announced  acquisition of Validus Re by AIG is just the latest chapter in the evolution of the traditional  reinsurance model, where specialty focused businesses seek shelter as part of a significantly larger globally diversified enterprise.

That is one of the conclusions of a briefing by AM Best completed in conjunction with Guy Carpenter called ‘Dedicated Global Reinsurance Capacity Remains Adequate.’

The report notes that conditions remain competitive, even as cession rates have begun to tick up, driven by recent catastrophe events and a general overall improvement in the global economy.

It notes that some observers believe that the reinsurance market has bottomed out and the uptick in rates at the January 2018 renewal is an indicator of an improving market climate. “While only time will reveal the truth, any long-term optimism seems foolhardy given the level and fluidity of reinsurance capacity available to respond to any opportunity,” the report said.

“Third-party capital continues to seek a larger piece of the pie, and the alternative capacity lost due to the 2017 catastrophe events has been replaced. The global reinsurance sector remains by all accounts over-capitalized.”

For 2017, AM Best and Guy Carpenter estimate dedicated reinsurance capacity, which includes $82 billion of convergence capacity, will likely increase slightly to $427 billion when compared to 2016. Convergence capital, which includes industry loss warranties, collateralized reinsurance, and cat bonds, continued to enter the reinsurance market, even as losses were being tallied from the events of 2017, the report notes.

Cat bond issuance continued to grow strongly through year-end 2017. Likewise, capital continued to flow into some collateralized reinsurance vehicles and sidecars. Traditional rated balance sheet capacity remained flat for 2017, as overall earnings were expected to be at breakeven and capital management strategies tempered due to the underwriting losses that were sustained.

“Traditional reinsurers are continuing to adapt as they become the gatekeepers of insurance risk. This includes managing risk share and aligning it with alternative capital for property and non-property classes of business. This trend is expected to continue,” the report says.

“There is a clear sense of the need to form larger, global, well-diversified operations with broad underwriting capabilities to assess risk and to serve as transformers of risk to the capital markets.

“The combination of Validus and AIG is a case in point of this inevitability. Reinsurance companies argue that they can best serve insurance companies in terms of matching risk with the most appropriate form of capital. However, as market players look to become more efficient, either through disintermediation or going directly to sources of risk, this tug of war will result in fewer hands in the pot. Ultimately, this will make it better for the purchaser of protection but likely at the expense of some franchises that exist today.”

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