Willis’ Sullivan says advances in modeling could end volatile market cycles

In the absence of a massive global event, hardening is more likely to occur along geographical and business lines rather than across the broader market, he said at a PwC briefing.

Mr Sullivan said that the previous three hard markets have been driven by a reduction of industry capitalisation and short-term difficulty in rebuilding and accessing new capital. Today, these historic across-the-board hard market cycles are unlikely to be replicated, he added.

In his speech entitled ‘Capital Availability, Modeling Advances, and Soft markets: A Broker’s View’, Mr Sullivan did warn that if reinsurers face a perfect storm of inflation and sovereign debt default, a global hard market would likely ensue.

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“Barring this type of financial Armageddon, the current levels of overcapitalisation may be reduced by losses and poor investment returns, but that should not return us to the bouts of capital starvation that drove market behaviour in some of the earlier hard markets,” he added.

Focusing on the impact of this change in historic market cycle patterns on industry stakeholders, Sullivan said that insurers and reinsurers will have to adjust to a new reality in which outsized underwriting returns will only be available on a localised basis, and even then possibly only for short durations.

“While underwriting excellence remains key, more sustainable competitive advantages need to be developed by the reinsurance industry through operational excellence and reduction of costs,” Mr Sullivan concluded.

David Law, Global Insurance Leader at PwC, said: “The industry needs to recognise that the drivers contributing to a hard market are changing. Simply managing the cycle will no longer produce adequate returns for investors or provide meaningful value for customers. This evolving landscape should be a catalyst for the industry to reinvent itself and demonstrate the value of alternative risk-management solutions. Reinsurers need sustainable strategies, built on differentiation and stakeholder needs, to help the sector demonstrate its value potential to the capital markets.”