Interview: Mike Van Slooten,
Protectionism and more excess capital
Aon Benfield has just published its September Reinsurance Market Outlook
report. Mike Van Slooten, head of market analysis–international at Aon Benfield,
discusses some of the key findings with Monte Carlo Today.
The Reinsurance Market Outlook report
mentions regulatory pressures. What are
your key concerns in this area?
When we look at regulation globally, we see
some jurisdictions that are beginning to show
protectionist trends. This raises a certain amount
of concern, as in many ways reinsurance has
been the poster child of globalisation—a
proven risk transfer mechanism that thrives on
the free movement of capital and risk. Some
of the regulatory changes that are happening
have the potential to hinder that, and I feel that
would be a backwards step for the industry.
Why is this important for reinsurers?
There are three key factors that affect pricing
in reinsurance: losses, interest rates and market
structure. When external forces affect the way the
market works then that has an impact on pricing,
as anything that restrains the free movement of
capital and risk adds costs to the business.
There are a few examples of this trend
emerging in Asia, partly spurred by regulatory
changes. We generally see risk-based capital
regimes as positive frameworks as they ensure
that companies understand risk and hold
sufficient capital against that risk. But the
downside is that they tend to be introduced in a
way that can make it more difficult for external
capital to enter the market. Making it difficult
to trade across borders adds costs to an industry
that really does not need that right now.
On a more positive note, the US has verbally
agreed to sign the US-EU Covered Agreement,
which should create pretty much a level playing
field between the two markets.
On the flipside, the US is also considering
tax reforms that could affect the provision of
What other challenges are reinsurers facing?
The basic dynamic is that there remains
excess capital in the industry. There has been
a resurgence of alternative capital entering
the industry this year, which has increased
competition. Reinsurers are still making
money—just less than before—and in the
Mike Van Slooten
“The basic dynamic is that there
remains excess capital in the
absence of big losses, we do not anticipate any
great shift in market dynamics. We do not think
Hurricane Harvey is going to be enough to
make much of a difference in this context.
In terms of alternative capital that has
entered the industry, the activity in the
catastrophe bond sector has stood out. At the
start of the year, our firm was one of the most
bullish in its projection that around $8 billion of
bonds would be issued this year, but this figure
was exceeded in the first half of the year alone.
The area that has shown real growth
over the past decade has been collateralised
reinsurance—around $50 billion of limit is
now being purchased in this way.
What has been behind this resurgence in
There has been a general trend of institutional
investors becoming interested in this space for
several years, but there is something of a lag
effect. It can take pension funds, for instance,
up to three years to complete due diligence
before investing in a new asset class.
Second, a lot of catastrophe bonds have
matured this year. Many investors were keen
to invest capital when they were renewed,
so some increased in size and that also put
pressure on pricing. A big attraction of this
asset class is its lack of correlation with other
The growth of this sector has had a knockon
effect to reinsurers writing business in a
more traditional way as they look to deploy
capital elsewhere. That means the pressure on
pricing can also be felt in other lines.
Most of these investors have a long-term
horizon and we believe there is a lot more
capital waiting on the sidelines for a better
How can reinsurers react to this?
The distinction between traditional and
alternative capital has blurred, and most
reinsurers have now incorporated it into their
own capital structures. Most have sidecars
in place and use it for their own retro cover.
Doing this allows them to lower their own cost
The market is making money and has done
so pretty much for the past 10 years. But it’s
a difficult environment and we sense that the
bigger, more diversified players are better
equipped to cope.
What other pressures are reinsurers facing?
The economic climate and continued low
interest rates. There are now some slightly
more positive signs, but we are not expecting
any major change in the near-term. n
Mike Van Slooten is head of market analysis–
international at Aon Benfield. He can be contacted
www.intelligentinsurer.com | www.bermudareinsurancemagazine.com DAY 3: Tuesday September 12 2017 | MONTE CARLO TODAY | 3