Now that the US hurricane season is over without any material events, I had a quick look over a few transcripts of conference calls in the specialty insurance and reinsurance sectors to see if there was any interesting comments on where the market is going.
Nearly everybody claims to be mitigating the challenging market conditions by ducking & diving between business classes whilst keeping their overall underwriting discipline. The softness in the reinsurance market has spread into the insurance market, albeit not to the same extent. The reality is that results continue to be flattered by reserve releases, low loss activity and improved loss trends. Market realities are slowly being reflected in ROEs which are coming down to the low double digits.
Nearly all of the reinsurers are claiming to be the winners in the structural changes in the “tiering” of the market whereby cedants are reducing their reinsurance spend and concentrating that spend amongst a select group of reinsurers. Everybody has special relationships and the gravity defying underwriters! That same old guff was the typical response in the late 1990s.
The only interesting comment that I could find was from the ever colourful Ed Noonan of Validus who, after claiming that not everybody is as disciplined as they claim (he was talking about the large generalist reinsurers), said the following:
“It’s unfortunate because the market has had such strong discipline for the last decade. There are no magical segments that are beautifully priced, and the idea that a well-diversified portfolio poorly priced risk makes sense is an economic capital model-based fantasy.”
The last sentence reminds me of one of my favourite quotes from Jim Leitner of Falcon Management that “there is no real diversification in owning a portfolio of overvalued assets“.
My view is that few economic capital models in the insurance market which are currently being used to allocate capital to business classes are taking such arguments seriously enough and most are likely over-estimating the benefit of diversification across soft or under-priced portfolios.