Perspectives interview with David Priebe – Vice Chairman, Guy Carpenter: Part I

bioDetail-david-priebeGuy Carpenter is a leading reinsurance broker with over 50 offices around the world. As Vice Chairman, David Priebe is responsible for advising some the world's largest insurance companies on their reinsurance strategies. He is also responsible for the team that structures many of the catastrophe bonds and sidecars that come to market each year.

Users who have registered (for free) can click here to read part two of the interview which asks how the industry has been changed by 'alternative' capital and M&A.

Guy Carpenter has estimated that 18% of reinsurance is now "alternative" capital. Is there a limit to the size of this part of the market?
The growth of non-rated reinsurance capital has been 22% compound annual growth since 2008 – albeit from a low base. It’s hard to say whether the growth in market share can be maintained – particularly if we continue to expand the overall pie. But we do expect to see continued growth overall.

Third Party CapitalWhat we do know is that there is significant interest on the part of investors who are currently not committed to the reinsurance business. And there is also increasing interest on the part of both asset managers as well as reinsurers to expand their assets under management, so we believe it's going to continue to grow and will grow beyond just property, where the majority of that capital is currently directed.

For example the alternative markets are already providing support in terms of terrorism, aviation, marine, trade credit and in other areas and we think that that list will continue to expand.

Is there a natural floor for reinsurance rates?

It’s really the perception and understanding of risk that matter. For instance, we've been pleasantly surprised how the results on liability lines have performed far better than what would have been actuarially evaluated five years ago. So pricing today is all relative to the perception of the performance of the underlying portfolio.

So it’s hard to say whether there’s a floor. We believe competitive pressures still exist and that should lead to further improvements in pricing from a cedant company's standpoint in terms of reinsurance pricing, both on non-cat and cat lines, but it's hard for anyone to say how that might translate into expected margins. It all depends on the risk analysis.

Has the reinsurance cycle fundamentally changed?

We’ve said for the past three years that we’ll be in a consistently soft market going forward. Capital will continue to flow in and out, and if there is an imbalance, the liquidity in the markets should address that imbalance pretty quickly and moderate any major volatility in pricing.

What size or type of loss or losses would it take to shake things up?

It would really require a confluence of a number of factors to truly shake the market, such as financial market volatility coupled with a significantly unexpected insured loss. The unexpected part is probably the most critical aspect to that, where it's a major loss that people did not anticipate and plan for. But that’s what our business is all about – insuring for the unexpected. Our industry has shown our ability to respond and deliver continued support at times of deep uncertainty and to deal with major unexpected losses.

What could impact investor appetite?

We believe alternative capacity is here to stay. Like all capital providers, some will adjust their positions as their own portfolio composition changes. So changing opportunities in other investment classes may re-divert some money towards other alternative classes.

Probably that unexpected loss situation where investors felt confident in their prior analysis and then something major happens to disrupt that confidence, could have an impact. That doesn’t necessarily mean that investors would leave the market, but it could change their views on how much capital to commit in the market and at what price.

However, these are sophisticated investors – they really understand what risks they are exposed to and they also see the value, particularly the non-correlated nature of this asset class in their overall portfolios. It's a highly sophisticated pool of money supporting this industry.

Users who have registered (for free) can click here to read part two of the interview which asks how the industry has been changed by 'alternative' capital and M&A.

Posted: Monday, October 26th, 2015