Survey shows growing acceptance of alternative reinsurance capital

by Artemis on November 1, 2013

An updated survey of insurance and reinsurance executives who attended the Property Casualty Insurers Association of America (PCI) Annual Meeting recently shows that acceptance of alternative reinsurance capital sources and solutions has increased in the last year.

The survey, by reinsurance broker Guy Carpenter, seeks to identify the key drivers and threats to profitable growth in the insurance and reinsurance industry and asked participants a number of questions regarding what they felt could make the difference to their business in 2014. It is the second year that Guy Carpenter has undertaken this survey which gives us a base for comparison to see how responses have changed over the last year.

In the 2012 survey, when asked what sources of reinsurance capital they intended to use in the coming year. 78% responded that traditional reinsurance vehicles were the way they would go next year but 16% said that alternative sources of reinsurance capital such as insurance-linked securities, catastrophe bonds and collateralized reinsurance vehicles would be their choice for risk transfer.

In this years survey 73% said they would be leveraging traditional reinsurance vehicles as a capital source for 2014, while the percentage saying they would leverage capital markets solutions and alternative reinsurance capital and vehicles rose by 2% to 18%. Of course the missing few percent are likely in the business of retaining more of their risk in the year ahead, a result of a capital rich industry.

Guy Carpenter said that the increase in respondents signalling they would use alternative reinsurance capital was; “A continuing demonstration of the increase in prevalence and appetite for alternative capital sources and vehicles in the market.”

Respondents have switched their focus this year to growing their business through geographic expansion, rather than new products which was the dominant answer in 2012. This year 33% cited geographic expansion as their biggest opportunity for growth, 24% cited new products and 23% new distribution channels. Last year new products was the top response.

This is encouraging for the ILS, catastrophe bond and alternative markets, as geographic expansion will bring with it new catastrophe reinsurance markets, better models and an improved understanding of risk in new regions of the world. This will assist the expansion of ILS and capital markets solutions as well.

Mergers and acquisitions also featured strongly in this years survey, with 15% of respondents citing M&A as their biggest growth opportunity, compared to just 7% in 2012.

“In this evolving market, the industry is identifying new methods of deploying capital efficiently to generate returns,” commented Andrew Marcell, Chief Executive Officer of US Operations for Guy Carpenter. “In this environment, and as supported by the findings of our survey, we are seeing that the market is increasingly turning to strategic M&A opportunities to achieve scale, global reach and a more diversified product suite in order to realize growth objectives.”

In terms of threats to the business, respondents selected undisciplined or unprofitable underwriting as the key threat, catastrophe and non-catastrophe losses as second, operational inefficiencies third and global economic uncertainty fourth. Guy Carpenter said there is an increasing focus on internal challenges as opposed to external threats of losses and economic woes this year.

Technology is seen as a growing opportunity for insurers and reinsurers, with 39% saying that they would spend a blank check on IT improvements, up from 35% in 2012. Talent and retention of talent is another key issue, 37% said they would devote a blank check to this area of their business while just 7% said they would put it towards new product development.

The results of this survey show an increasing and growing acceptance of ILS and alternative capital, a reduced reliance on traditional reinsurance, more retention of risk is likely and a continued focus on underwriting discipline will be key. In terms of growth, moving into new geographic regions is where the market feels it can best profit and this will help the ILS and alternative markets as they seek out new peak perils to deploy institutional capital into.

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