Korean Re puts catastrophe bonds, alternative capital in its roadmap

by Artemis on January 28, 2014

Korean Re, currently the 9th largest reinsurance firm in the world, has published a three-stage strategic roadmap with the ultimate goal of becoming one of the top three reinsurers. Unsurprisingly, catastrophe bonds and alternative capital will feature.

Korean Re CEO Jong-Gyu Won announced the strategic plan called Vision 2050 recently, with the aim of turning the Korean reinsurer into one of the world’s top reinsurance firms. The roadmap calls for the reinsurer to source 80% of its business from overseas as part of this goal.

To achieve this aim the reinsurer needs to bulk up, both in terms of overseas expansion, with more branches set to be established in key markets, talent acquisition of underwriting expertise as well as by expanding its capital and capacity to support these goals.

Mr. Won commented; “Our competition has so far been predominantly with international reinsurers operating in Korea. But now we should brace ourselves up for a no-holds-barred global competition in a real sense of the word. Vision 2050 will guide Korean Re to grow into a global reinsurer built upon a sound risk management philosophy and expertise. And domestically, it will help us continue to carry out the mission of supporting sustained development of our economy, industry and society.”

The first stage of the roadmap, to be completed by 2020, is all about expanding capacity and credit ratings by improving profit and issuing subordinated bonds. Korean Re will also expand its overseas network in this period, develop a reliable pricing system for risk and look to grow its pool of underwriting talent.

The second stage, to be completed by 2030, will see the reinsurer look to secure strategic investment from overseas, gain an S&P rating of excellent, seek equity investment into foreign businesses, develop profitable overseas accounts and establish regional headquarters to drive growth.

Also in this second stage of the Vision 2050 roadmap is a stated desire for Korean Re to issue catastrophe bonds and leverage other forms of alternative reinsurance capital, to further strengthen its capacity and credit ratings.

The third stage of the plan, to be completed by 2050, will see Korean Re seek to expand its share of good risks globally on the back of increased capacity, establish a global underwriting platform based on 40 branches and offices worldwide, set up a think tank to support product development and position Korean Re as a global insurance group.

It’s encouraging, but not surprising, to see Korean Re explicitly mention catastrophe bonds and alternative reinsurance capital in its strategic plan. Leveraging third-party capital from investors and capital markets sources will help Korean Re to lower its own costs of risk capital, lay off risk to investors to free up capital for more underwriting and if it chooses allow it to underwrite business using lower cost alternative capital as well.

Korean Re could easily accelerate its use of alternative capital and look to issue a catastrophe bond sooner than 2020 of course. The market would likely be extremely interested in the prospect of such a transaction and investors keen to back it if the risk modelling and deal terms were acceptable to them.

Korean Re will face stiff competition as it tries to climb up the reinsurer rankings into the top three. With traditional reinsurers feeling the pressure from new capital from third-party sources as well as a well-capitalised traditional market as well the competition for growth opportunities is likely to be significant. Other reinsurers will also be thinking about scale as a good way to fight off competition, perhaps making acquisitions even more likely as we go forwards.

Leveraging the capital markets and investors to reduce its cost-of-capital could give Korean Re an edge, particularly in Asia where other reinsurers are not tapping third-party capital as regularly as those in Europe, Bermuda and the U.S. If Korean Re could tap into large institutional investors in Asia, providing a platform for them to access the return of the reinsurance market, it could find itself in a very good position to grow.

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