The industry is living on “borrowed time” before another cycle in the market drives an increase in pricing, Third Point Re president and CEO Robert Bredahl has said.
Speaking at re-Insurance.com’s Pre-Monte Carlo Briefing in London the executive said it was a myth that there would be no more market cycles.
“The first half of my career, I worked on a trading floor,” he explained. There, Bredahl says, he was repeatedly told that there would be no more market cycles.
But he said that was a fallacy. “I always heard this just before there was a big dislocating market event,” he said.
“So you hear it a lot [in the reinsurance market] now - and yes, I think the cycles might be muted going forward - but we’re still going to have cycles.”
He argued that the falsehood had been perpetuated by the erosion of barriers to entry allowing capital to easily flow into the industry in the wake of shock losses through cat bonds, collateralized funds and side cars.
“There’s all sorts of mechanisms, product structures to bring new capital into the industry following a big event,” he went on.
“The theory is: if there’s a dislocating event, prices go up, but capital will swarm in and keep the prices down. And I believe in some of that - but still, the alternative capital still makes up a relatively-small part of total capacity.”
In reality, he said the last decade has been very benign, adding that even last year - when the sector was stung by Hurricanes, Harvey, Irma and Maria as well as wildfires in California – the industry’s combined ratio barely edged over 100 percent.
“When we have bigger events, we will see a cycle again and sadly I think we’re on borrowed time,” he said.
Meanwhile, he said the industry was becoming more concentrated. He explained that the number of reinsurers reporting to the Reinsurance Association of America (RAA) fell from 119 in 1980 to just 36 a decade later. By last year, there were only 26, he said as he argued that reinsurers were getting bigger solely for the benefit of shareholders.
“Larger reinsurance companies tend to trade at better multiples despite lower expected ROEs,” the executive said.
He argued the suggestion that cedents prefer to concentrate their buying with large, full-service reinsurers was also myth.
Instead, he said, reinsurance buyers learned to syndicate their buying after the 2008 financial crisis when larger, highly rated (re)insurance companies suffered the most.
“Buyers and brokers want many reinsurance company relationships to see a wide breadth of ideas, approaches and pricing philosophies and to minimize capacity dependency,” the executive said.