Wholesale risk markets must “re-price, re-term, re-baseline” – Millette

The world has a “vibrant wholesale risk market”, spanning insurance, reinsurance and insurance-linked securities (ILS), but it’s time to go back to basics, industry expert speakers explained at Convergence 2022 in Bermuda last week.

During a panel discussion at the ILS Bermuda Convergence 2022 conference last week, senior industry speakers talked about where the reinsurance, ILS and wholesale risk markets that encompass them find themselves today and what comes next after hurricane Ian.

After the panel discussed soft market type challenges, that were exacerbated by the competing down of pricing for risk, AXIS Capital CEO Albert Benchimol commented, “The world doesn’t need the reinsurance industry of the last five or 10 years.

“It needs a new, more disciplined, reinsurance industry that has more respect for its capital and my hope is that we’re going to start to see that.”

Michael Millette, Founder and Managing Partner of Hudson Structured Capital Management, took on the thread of conversation, delving into what he sees as problems and potential solutions, or ways to move forwards.

“The mission of reinsurance is to be at the centre of wholesale risk markets. But not to be all of wholesale risk markets,” Millette explained.

Laying out the landscape, he continued, “Wholesale risk markets will include investors in funds, investors in sidecars, other participants.

“So a broad world of wholesale risk markets, that are pricing and bearing different vectors of volatility.”

“That part of the business has had, perhaps two problems. One problem is perhaps discipline, certainly discipline. But another problem is that the wholesale risk market is working to try to find its way out of a dying paradigm.”

Here Millette offered some advice to the audience, as to how the industry moves ahead and more profitably and sustainably.

“It needs to simply re-price, re-term, re-baseline, its business and I think that that’s going to be an exciting endeavour.

“So instead of this being a conference where we all talk about how it’s not working, let’s get mission focused.

“Let’s create a wholesale risk market that lets big branded primary companies do what they need to do, which means that things have to be priced and termed properly,” Millette said.

Peter Bell, CEO of Everest Reinsurance Bermuda, picked up on the same topic, adding his view that, “It’s a question of making sure that we price the product properly, and also understand what product we actually want to give out.

“It’s just going back to basics. You know, what they said at CIAB was very different to Monte-Carlo, Ian was just the last nail in the coffin.

“Because Ian in itself is not a massive loss, it’s just coming off the back of Ukraine, COVID, inflation.

“So whichever way you want to look at it, you know life has to change for a reinsurer.

“It’s going to be back to back to basics, charge the right price, and then make sure it’s what you actually want.”

Going back to the concept of wholesale risk markets and referring to the development of the Bermuda reinsurance and ILS industry, Millette said there’s a lot to be positive about.

“”That’s been wonderful. That’s been impressive. We have a vibrant wholesale risk market. But right now it’s a little bit off because it was organised around a world where there was an occasional large event and then you refuelled and now we’ve had six years of relentlessly frequent, we’ve had five $20 billion hurricane events in six years, seven $20 billion cat events,” he explained.

Adding, “We now have a wonderful thing going for us. We have 20 more reinsurers, 45 more funds, life reinsurers. We’ve got this marvellous, diverse wholesale risk market.

“But we also have some changes in the world around inflation, moral hazard and climate change and we just have to bring those things together.

“So it’s more of an adjustment than a crisis and it’s exciting.”

On the topic of capital, fundraising and what comes next after hurricane Ian, Millette went back to the need to have adequate pricing first and foremost.

“The world needs a wholesale risk market, and so if all the wholesale risk capacity goes away, then it will have to be repriced, to clear a new wholesale risk market. Because the insurance industry can’t function without a wholesale risk market at its back.”

“The market will reform itself, but there may be some ragged times in between,” Millette closed.