Insurers buying reinsurers was unthinkable 10 years ago, but the sum of incremental changes has caused what now looks like a seismic shift

A veteran returning to Monte Carlo is swiftly reminded of his own mortality.

This is because the older one gets, the shorter the intervening year between visits to the principality seems to last. Blink and you can almost forget which year it is.

Coming to the same place for five days a year for 14 years is a great way of noticing what has changed.

Because we know this place so well, we can see differences that a local person would miss. Small incremental daily changes can go unnoticed, but when they compound over a year, the contrast is striking.

So perhaps this is the true value of the Rendez-Vous? A once-a-year frank and honest look at ourselves, with nowhere to hide? Reinsurance is a place we know very well. We write about its incremental evolution day by day, but rarely reflect on what any of the small changes are amounting to.

Reinsurers have had more than enough to remind them of their own mortality in the past 12 months. Big cats, difficult markets and capital reloads from competitors in ILS seeking to cement their position.

The icing on the cake is a failure to produce returns that adequately and consistently exceed the cost of capital. M&A interest from the biggest insurance names in the world is the cherry on top.

If reinsurers are challenged, insurers have it even worse, and on a far grander scale.

Swiss Re’s latest Sigma report spells it out in capital letters – insurers all around the world don’t make good enough returns.

They need to be able to raise pricing while at the same time defending their bread-and-butter business from all kinds of disruption. My guess is they probably won’t be able to do this fast enough to keep pace with the rising cost of claims and capital.

If your returns aren’t good enough you can do one of two things – you either improve profitability through pricing and tighter terms and conditions or you reduce the amount of capital you have to hold.

If insurers can’t do the former they will start doing more of the latter.

And right now, insurers have willing partners in the reinsurance world and further up the food chain, happy to take on increased cessions and package them up and sell them into places with lower return expectations.

Buying a reinsurer and ILS capabilities helps you do all that while at the same time the mere act of becoming bigger also reduces your cost of capital by sheer weight of numbers.

No wonder we are seeing so much deal activity.

Back in the dark ages when I was a broker, all big insurers owned reinsurers. Then they lost a lot of money, lost confidence and got out of the business.

This does beg the question – why should it work this time?

It is slightly different. James Vickers of Willis Re pointed out at his firm’s Sunday morning briefing that back then insurers were all run by dyed-in-the-wool insurance folk who had risen through the ranks.

They weren’t so good at doing transformative deals. These days they are all run by McKinsey types, fully au fait with M&A and financial engineering.

Better tech and analytics also means that they are far more comfortable with what they are getting themselves into and are confident the numbers won’t suddenly throw up nasty surprises.

The idea of insurers buying reinsurers was unthinkable 10 years ago. But once again the sum of small incremental changes has caused what now looks like a seismic shift.

Welcome back to the harsh but healthy mirror of Monte Carlo!