Pricing challenges dominate discussion at forum

Insurance buyers must be persuaded to change their attitude towards pricing to allow insurers and reinsurers cope with the rising cost of capital, regulatory change and a non-performing investment market.

Marty Becker, CEO of Bermuda-based reinsurer Alterra Capital, which was recently acquired by Markel, highlighted the pricing issue when asked to identify the key risks facing the insurance industry.

“All of our products have been priced and modelled in expectation of an investment yield higher than it is now. And clients, because of competition, are unwilling to take a lower return on equity (ROE). There is also a rising cost of capital,” he began.

“There has been a move to non-traditional assets without changing liabilities. This works until it doesn’t work and then it is painful. How are we going to persuade buyers to change their attitude to allow us to price to get a ROE that covers our cost of capital? That is the game we are playing right now,” he added.

“It is a huge issue for reinsurers,” agreed David Watson, president and chief executive of XL Re. “I am surprised there has not been a correction in pricing.”

The prospect of increased inflation and the effect it would have on reserves is also a concern for reinsurers. “Reserve releases are a valid exercise if you have a surplus,” said Ted Dziurman, general manager and executive director, PartnerRe. “Time will tell whether people got it wrong but reserving is what you do.”

Emerging risk has been cited as an area of opportunity for the insurance industry. But while Becker accepted that for insurers that work out how to sell cyber risk insurance the opportunity for growth is ‘enormous’, he also added that take-up of cover among clients remains low.

“Emerging risks have a lot of sex appeal but traditional insurance still provides the bulk of premium income. And a number of emerging risks are covered under traditional policies. How much are clients willing to transfer risk and how much are they willing to pay for it? It is not always very much,” he said.

A more fruitful source of growth may lie in emerging markets rather than emerging risks, said Becker.