A confluence of global miseries is creating a sort of giddy prosperity and hope for the future in the reinsurance world.
In the June-July contract renewal season, the reinsurers have received double-digit price increases for covering a broad range of property and casualty risks. Premiums for directors’ and officers’ liability coverage are up as much as 75 per cent. Reinsurance for US trucking fleet liability risk has in some cases tripled in cost.
Tom Libassi of ILS Capital Management, which runs a group of reinsurance assets in Bermuda, attributes the hardened pricing to what insurers call “social inflation”, ie the willingness of people to take each other to court.
Filing a lawsuit against an insurance company or lawyer is easier now, thanks to litigation finance companies that have raised capital-markets money in recent years. That has made writing liability coverage for large corporations much less attractive, therefore more expensive.
And it’s not just the premium rates that have gone up. Terms and conditions for reinsurance coverage are rapidly becoming more strict, particularly after the wave of lawsuits against insurers, which refused to pay out for Covid-related business interruption insurance. Now, in most new policies, any ambiguity about pandemic losses is gone; those are just not covered.
You might think there have been hurricanes, earthquakes and other natural disasters over the past 20 years. Why didn’t those lead to substantial and lasting increases in insurance costs?
Basically, there was increasing ease of entry to the reinsurance trade in recent years, in part created by alternative providers of coverage who bought capital markets instruments such as catastrophe (cat) bonds. Even after the huge losses from, for example, Hurricane Katrina, which devastated New Orleans in 2005, cat bond capital was able to flood back in to the industry after the initial premium spikes.
A quirk in Florida law has made it easy for homeowners there to assign their storm loss claims to others, ie lawyers. Then, in a short period of time in 2017, three named storms in a row hit the US south-east, Puerto Rico and Florida. The last of these, Irma, proved the most problematic for the capital markets based insurers.
The Irma claims have led to unexpectedly large “loss creep”, and are still wending their way through the Florida legal system. Since the alternative reinsurance providers have to provide specific collateral, ie investment grade bonds, to cover any possible claims until all the legal questions are resolved, there are tens of billions of trapped collateral from the alternative providers tied up at the mercy of Florida courts.
Those billions are not, therefore, available to compete with traditional reinsurers, whose promises are backed up by a diversified balance sheet and ongoing revenue. So the pandemic disaster, as well as the investment losses in the first quarter of this year, meant that big-ticket coverage buyers had no alternative to buying (now expensive) coverage from the reinsurance companies.
In a real-return starved world, you would think this high-prices-desperate-buyers market would attract new entrants, such as private equity or hedge funds. Yes, there are start-ups being papered up, modelled out, and slide-decked, but it takes a while. Ratings have to be established, cash has to be raised, state regulators need to be satisfied, and so on.
Dan Loeb’s Third Point, specifically Third Point Reinsurance Ltd, was ready to be lucky. A Chinese wealth management company, CMIH, had some problems with finding the readies to meet a bond payment or two, and found it advantageous to merge its own reinsurer, Sirius International, with Third Point Re. The deal was done on favourable terms for Third Point, as can be the case in difficult times.
The Third Point/Sirius merger, which closes early next year, has a somewhat complex structure involving a new-money equity investment by Mr Loeb himself, and CMIH will retain a share. It would seem, though, that Third Point was able to buy Sirius for about 80 per cent of book, at the very moment the reinsurance market was finally taking off. Third Point Re had total assets of $2.5bn at the end of the second quarter in 2020; the combined company will have $6.1bn when the deal closes.
And Third Point gets to manage the premium income and reserves. A better business than chasing the indices, I think.
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