Research

2018 Marketplace Realities: Property Market Update

Capital trumps catastrophe

February 14, 2018
| Canada, United States

By Joe Peiser and Gary Marchitello

Executive Summary

Following the widespread catastrophe activity of 2017, there was much uncertainty about the financial magnitude of insured damage, expected pricing of January 1 insurance and reinsurance renewals, and the status of alternative capital’s reentry into the reinsurance market. We published our 2018 Marketplace Realities Report and forecast in the midst of that uncertainty with a promise to publish an update to our property section as soon as market conditions came into clearer focus.

While we have more clarity, much remains up in the air. We have a better, but still incomplete, handle on the magnitude of the insured damage. Power is still out for many in Puerto Rico, where the ultimate damage tally will not become clear for some time. But we are closer to putting a number on the insured loss, a number that, wherever it ends up, will set a record for our industry. We can look back on January 1 insurance and reinsurance renewals and report increases that, for the most part, were not as steep as many initially feared. We have seen a remarkably positive response by the insurance-linked securities (ILS) industry to some very significant losses. This has kept the supply of capital in our industry at record levels, so the inexorable laws of supply and demand can do their work and benefit our clients.

ILS has changed the marketplace

In fact, after a record year for ILS issuance in 2017, our ILS expert, Bill Dubinsky, in a recent report says, “Rather than running away from the losses, ILS capital is running toward both the short-term potential for modestly better risk spreads and the longer-term opportunity to partner with reinsurers, insurers and insureds to fuel assets under management and ultimately make insurance more available and affordable. We see no end in sight to ILS growth as a long-term trend.”

Historically, following other major catastrophes, start-up insurance companies arose, mostly in Bermuda, to fill the need for new capital. After 9/11 and after the hurricanes of 2005, $11 billion and $10 billion of new insurance capital, respectively, were raised. Given legal and regulatory requirements, infrastructure build-out, hiring and staffing, this process typically took up to a year. This compares to ILS funds that can be raised in weeks. So, while it’s unclear if the losses of 2017 will stir demand for a new class of start-up insurers, it is clear that the swift fluidity of alternative capital has fundamentally changed marketplace dynamics. That may be the chief lesson from 2017.

It is important to note that there is a difference between the efficiency of insurer/reinsurer capital versus ILS capital. Historically, ILS capital has only provided $1 of capital for $1 of limit, whereas insurer capital can provide multiple limits for every $1 of capital. Even this is starting to change, as investors find ways to leverage their capital to more efficiently access risk. While the traditional insurance industry will not be replaced by ILS, the industry has been changed, and the changes are permanent.

Getting it right

The reason for our promise of an update to our November report was that, admittedly, we had trepidations about releasing a forecast while events were unfolding. Predicting the future is not easy even in the calmest conditions. So we are pleased to report that our published predictions aligned with actual market behavior; we were pretty much spot on. While it is nice to be right, even more satisfying is the confirmation of our process in arriving at our forecast. We brought to bear the same resources and approach we do in serving our clients: sophisticated analytics, deep knowledge of the markets and the alternative capital world, and a primary focus on what our clients, the insurance buyers, are hoping to achieve in the risk transfer marketplace: resilience in the face of a world that can deliver the kind of punishing losses that have hit North America in the past few months.

As risk advisors and insurance brokers we are committed to helping clients achieve resilience. We hope you find the insights and analysis in Marketplace Realities useful, and we look forward to working with you to navigate this marketplace and develop a robust risk management strategy. We expect to publish our next update — a complete update of all lines we cover in the publication — in April.

Joseph C. Peiser
Head of Broking
Willis Towers Watson North America
Senior Editor
Marketplace Realities

Download the full report to learn more.