One of the worst years ever in terms of disaster losses is unlikely to scare off new sources of property & catastrophe insurance capacity pouring in from the capital markets, and may even have whet their appetite for additional investment, much to the chagrin of incumbent carriers.

Indeed, despite paying out tens of billions of dollars in claims from multiple hurricanes, wildfires, and other major events, speakers at the recent Property/Casualty Insurance Joint Industry Forum recounted how low-to-mid single-digit premium increases were the rule rather than the exception for most Jan. 1 renewals in disaster-prone areas, while the rest of the market generally saw few to no hikes (and some even enjoyed cuts) in their rates. Reinsurers in particular, it was pointed out, had anticipated much bigger boosts to their top lines than what actually materialized.

Insurers and analysts discussing the state of the market on panels at the Forum and swapping war stories during the breaks expressed dismay at how overcapitalized the industry remains, so much so that 2017 insured disaster losses estimated at $130 billion or more are not expected to make much of a dent in record surplus levels.

How can that be?

It all comes down to the simple yet potent law of supply and demand. A big part of the equation is that so-called “alternative” market players continue to inject additional capacity into property & catastrophe insurance, thereby undermining pricing leverage and profitability for legacy carriers.

Take reinsurance, where alternative capital was up 9% to $82 billion in 2017, accounting for nearly one-fifth of overall capacity, according to an analysis by Guy Carpenter & Company, completed in conjunction with A.M. Best Company. And there's no indication capital market players financing insurance-linked securities and new reinsurance entities are going anywhere anytime soon.

Four years ago, reporting from this very Forum, I cited a sense of alarm and dread being expressed by more traditional insurers when these disruptors started entering the market in force. Back then, there was plenty of dismissive talk about how “naïve” capital from hedge funds, private equity firms, pension funds, and individual investors would likely flee the insurance space at the first real sign of trouble — that is, when a major catastrophe or series of events hit. Yet even though disaster losses kept piling up, investors appear to have weathered the storms and decided to stick around, much to the mainstream industry's surprise.

One reinsurance executive at the Forum told me that because disasters tend to tie up capital in catastrophe bonds until claims are all resolved, the sheer number and severity of 2017's events was expected to at least slow recapitalization of the securitization market, as investors waited to see what they actually lost before determining how much they wanted to reinvest — or perhaps even call it a day. But, if anything, the opposite seems to be occurring.

Some “alternative” players may be reinvesting because they anticipate regaining their losses through rising cat bond yields. Many also probably figure the odds have shifted in their favor, betting we won't have two horrific years like 2017 in a row.

Many capital market players have become mainstream capacity providers. (Photo: iStock)

Newbies exhibit staying power

At this year's Forum, run by the Insurance Information Institute and supported by a host of industry associations, most speakers acknowledged that insurers and reinsurers may have underestimated the staying power of their new rivals, predicting that much of the alternative capacity in play today is probably here to stay. One major CEO went so far as to observe that at this point, “alternative” may be a misnomer, as many capital market players have become mainstream capacity providers.

How did that come about? It's likely because certain underlying fundamentals that made property & catastrophe exposures such an attractive investment option for capital markets in the first place haven't changed just because we had one really bad year. Dabbling in insurance still gives these investors the opportunity to diversify their portfolios with uncorrelated risks, as well as earn higher yields than what's usually being offered by other, more traditional fixed-income securities in this era of historically low interest rates.

Meanwhile, insurance risk generally makes up a relatively small portion of overall exposure for most capital market players, so even a horrible year such as 2017 is unlikely to “ruin” any particular investors, or sour most on renewing or entering for the first time.

The potential positives still appear to far outweigh the possible negatives, especially with the widening gap between insured and uninsured disaster damages (such as public infrastructure and economic losses) providing a tempting target for additional capital market solutions. Indeed, rather than being scared away from the insurance realm, investors are probably just as likely to expand their horizons to tackle other hard to place exposures, such as cyber risks, flooding, and longevity risk for annuities.

The ties that bind

A few years ago, at this Forum, I noticed that despite all the talk dominating the meeting about the influx of alternative capital providers, no such newcomers were speaking on the panels, and no securitization specialists or hedge fund managers were even on site as attendees. Even though they can no longer be considered anomalies in the insurance business, and the Forum agenda was expanded from two panels to five this year, there were still no alternative market players to be found.

I have always thought of the Forum as the industry's annual family reunion, where all the major insurers, association leaders, and analysts gather to compare notes about the biggest challenges and opportunities in the year ahead. In that spirit, isn't it time for insurers to invite their new capital market “in-laws” to the party, hear directly what they make of the rapidly evolving insurance world, discuss their growing impact on the market, and get a sense of what new exposures they may be securitizing, rather than talking about them ominously in the third person?

Sam J. Friedman is former Editor in Chief of National Underwriter's P&C edition. He now serves as insurance research leader with Deloitte's Center for Financial Services in New York.

These opinions are his own.

Friedman can be reached by sending email to samfriedman@deloitte.com, or follow Sam on Twitter at @SamOnInsurance or LinkedIn.

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