Reinsurers face a challenge because “if they are retaining less cat business by using alternative capital, this also erodes profitability”, he told DWIC delegates.
“Disruption to a core product is creating a change in the way traditional reinsurers are approaching their business with their clients,” Watson said.
Watson added that he expected “more and more emphasis on margin expansion in other lines of business, whether it’s short tail or long tail business”.
He continued: “Reinsurers can no longer rely on a portfolio of profitable catastrophe business to subsidise marginal proportional or risk excess of loss business.
“Over the last renewal season we saw the first signs of change in some markets and I believe this will continue. It will be interesting to see how that evolves in the short to medium term.”
Watson went on to discuss a change in client buying patterns.
“Most buyers I meet – while they always want product specialisation and knowledge – are generally only interested in their core reinsurers, who by and large support their business across much of their reinsurance spend and who take a holistic approach to the relationship rather than a product-specific one,” he said.
“Clearly, there is greater emphasis on strategic reinsurance purchasing at the highest corporate level, leading to trading with specific and identified reinsurers for many different reasons. In many markets the focus today is on reinsurers with global capability and scale, who can bring greater knowledge and experience to the transaction,” Watson added.
Buyers still want diversification, he emphasised, while mid-tier reinsurers seek to continue to grow their market share, whether organically or by making acquisitions.
“Diversification of markets on a core reinsurance panel seems to be desirable with no one market dominating, and it seems this will continue and could possibly accelerate over the next few years,” Watson said.
On changing global market dynamics, he noted the beginnings of “an underwriting and pricing correction in many key markets across a wide range of products”.
But he issued a word of warning to those searching for capacity outside of traditional markets, adding that “underwriters need to be aware of the risks involved”.
On reinsurance in the Middle East, Watson said that the region “suffers from over-capacity, soft pricing and significant risk aggregation, which makes it a very difficult trading environment for reinsurers”.
Despite some capacity being withdrawn from the Middle East in recent years, primarily as a result of poor performance, he said that the reinsurance market remains resilient in the region.
“My observations on the disruption in the catastrophe market do not directly impact the region given the modest level of catastrophe exposure. However, indirectly I sense more focus on margin expansion and less ability for reinsurers to subsidise underperforming business as their margins are being squeezed everywhere,” Watson said.
“Having said that, I do feel there are opportunities for reinsurers in this region, and in Dubai in particular, to work closely with their clients to provide solutions whether they are designed to improve the capital position, reduce volatility, or just provide capacity,” he continued.
“However, to be successful, it does require a deep knowledge and the ability to add value to the transaction through design and leadership. Fortunately, the Dubai International Financial Centre, with its outstanding infrastructure, common legal and regulatory framework and growing talent pool is a great foundation to build upon.”
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