Faced with unprecedented structural changes as a result of a flood of capital markets money seeking to cash in on writing reinsurance risks, the global reinsurance industry faces a fight for survival. But one top broker has proposed a shift in thinking that companies might use to succeed.

Guy Carpenter’s head of sales operations (UK/EMEA) and market relationships, Chris Klein, was addressing the Insurance Day Bermuda Summit 2014 last week at the Fairmont Hamilton Princess Hotel.

He said: “The world’s six fastest growing companies are involved in information technology, social media, networking, advertising and branding.

“These are industries that have quite significant exposures which have not yet been fully explored, investigated or priced. The insurance industry has not fully explored the real value or protection it can bring to these companies.

“We have to take the initiative. We are in the business of risk. We have to take some.”

Mr Klein was one voice on a panel moderated by Insurance Day editor Michael Faulkner established to consider the question: “Reinsurance in Bermuda and globally — where do we go from here?”

The panellists all agreed that change was needed. The panel included: Christopher Schaper, president of Montpelier Reinsurance Ltd; David Flandro, global head of strategic advisory, JLT Towers Re; and, Tom Hulst, CEO, Ariel Re Bermuda Ltd.

Mr Flandro said that the structural change has been the significant alternative capital that is seeking to get in on the business of financing risk — specifically the reinsurance business.

He said: “New capital coming into the market is $30 billion to $50 billion. There is a difference this time, compared with previous influxes of capital.

“After Hurricane Andrew, after September 11, after Hurricane Katrina, after Hurricane Ike — those capital influxes were demand driven. The sector needed the capital and capital providers came to the table.

“This time the capital influx is supply driven. Investors are looking for uncorrelated or lowly correlated yield on their investments and they’ve decided reinsurance is the place to come in. We are awash with capital and we have to find out how to manage it.

“There are opportunities in this environment, but let’s not mince words. Six of the last seven reinsurance renewals have been down, and markedly down. This has been a continuing theme and it looks set to continue as this capital comes in. This is not an easy environment particularly when we have 60-year-low interest rates.

“Return on equity — which our investors look at — has been good. 2013 was a very low cat year. Share prices have gone up. But return on risk has been going down.”

Mr Klein said the industry was absorbed with worry about supply side issues such as optimising balance sheets.

“What I don’t hear so much,” he said, “is the other side of the equation. How do we find new business? How do we find opportunities to write new business that doesn’t exist right now?

“There was $1.7 trillion of uninsured natural cat losses over the last 40 years or so. There is some demand that can be occupied. Much of that is frequently absorbed by governments — many of which are fiscally constrained.

“Our business is just as much about transferring risk and providing protection, as it is about capital optimisation.”

Mr Schaper explored the pressure on the returns of reinsurers, with pricing down across the board. He said: “The market is in a changing stream. In the past few cycles we have seen rates ebb and flow.

“In the broader landscape, when you look at results of actual insurers and reinsurers, those with broader diversified portfolios may have more difficulty creating the proper return environment than those more focused on one line of business.

“A lot of companies are producing combined ratios pretty close to 100 percent. If you don’t have cat, it doesn’t mean you won’t have a loss year. You can have companies with combined ratios approaching, or over, 100 percent although it has not been a bad year. It’s not specifically driven by whether you have cat exposure or not.”

Mr Hulst said that the increase in capacity has driven rates down 15 to 20 percent. Demand has been relatively flat and maybe slightly up in some cases. Florida pricing is down and the model margins are lower than last year. But in absolute terms, the business remains contingent on loss activity.

He pointed out: “In the lines of business in which many of us participate, whether an event happens or not really dominates the result for the year. So we can go along for a period of time with relatively good reported results, even when our modelled expected margins continue to decline.”

He noted: “Everyone on the Island is fundamentally de-risking their business, in some way, shape or form, either through front-end affiliation with funds management or back-end hedging of the risk. To a degree, it’s larger than historically — more than what would have been done when gross margins would have been stronger.

“Staying close to customers is a piece of the puzzle; maintaining that franchise is really critical; managing expenses is critical; and fundamentally maintaining risk selection discipline, because the dominant driver of performance over the long run in our business is risk selection.

“And the better risk selectors, regardless of the capital they are managing, are going to attract the cream all the time.”