Reinsurance in ’precarious spot’ says Berger
By Jonathan Kent
The constrained supply of capital means the reinsurance industry is going through "scary times", Harbor Point Re chief executive officer John Berger told delegates at the Insurance Linked Securities Summit yesterday.
In his keynote speech to open the conference at the Fairmont Southampton yesterday, Mr. Berger said the reinsurers had to make sure they got paid adequately for risk, because investment income was not contributing to revenue in the way it used to.
Mr. Berger led the establishment of Harbor Point Re in Bermuda in December 2005. After the huge losses from Hurricane Katrina that year, the industry was able to "recapitalise with $50 billion raised virtually overnight", Mr. Berger said.
"We raised $1.5 billion and we could easily have got $5 billion," Mr. Berger said of Harbor Point. "That does not happen today. Things are loosening up, but things are a long way from where they were.
"The property and casualty insurance industry is in a precarious spot right now."
As companies struggled for their very survival, they would seek "the cheapest insurance out there", Mr. Berger said, which would make any hardening of rates slow to materialise. Reinsurers were also getting paltry investment returns, he added. "You have got to get more money for your risk, because you are not getting investment returns any more," Mr. Berger said. "What if you have a big event and can’t reload?"
One of reinsurers’ roles was as a source of capital to the economy, Mr. Berger added. And reinsurers had to maintain their balance sheet and risk appetite to maintain a strong future for the industry.
"We’re one big Florida hurricane away from having a national reinsurance programme in the US," Mr. Berger added, saying that if reinsurers did not maintain their risk appetite and left gaps, then governments would step in.
The events of recent months had shown that "common sense is not so common".
"With hindsight, common sense is easy of course," Mr. Berger said. "We look back now and see that AIG had $450 billion in credit-default swaps; some people had all their money invested with Bernard Madoff; people packaged up mortgages into securitised products and many people invested a lot of money in them.
"It’s all about herd mentality. Common sense in our business is huge."
Mr. Berger said there was a constant quest for diversification to spread risk. As a result, there were very few pure reinsurers left in the market, as taking on some primary insurance business was an easier way to diversify.
Assessing the optimal level of exposure was crucial, with the knowledge that bigger was not automatically better, a theory borne out by the woes of the biggest insurer of them all, AIG.
"There are always going to be problems, but the good companies will be able to deal with them," Mr. Berger added.
Mr. Berger also gave his view on the evolution of insurance regulation in the US. The industry has long called for a single federal insurance regulator, rather than the current system which employs a separate regulator for each state.
"I’m worried that we will end up with both of them — a federal charter and 50 state regulators," Mr. Berger said. "I think people are obsessed with systemic risk right now and I think the change is going to come. We’d be much better off with a strong, federal regulator."