The insurance-linked securities (versus traditional reinsurance) job gap

The Bermuda Finance Minister Bob Richards has highlighted the issue that insurance linked securities funds and institutional investor backed reinsurance capital managers do not create the same number of jobs as traditional reinsurance companies.

The Minister’s comments on this issue are highlighted in this article from the Bermuda Royal Gazette.

Richards said that new ways of buying insurance and reinsurance do not generate the same amount of jobs as traditional insurers and reinsurers have in the past. This is of course true of many industries, where technology and innovation have led to streamlined processes and a reduction in workforce headcounts.

For an island nation like Bermuda, or other reinsurance and finance specialist domiciles, this is a particularly important issue. Many domiciles have relied on the highly skilled workforce that goes hand in hand with reinsurance and financial market businesses and as these sectors modernise workforce count tends to decrease.

Richards explicitly referred to the insurance linked securities market, where third-party investors such as pension funds and capital markets players are ultimately the source of underwriting capital for an increasing portion of the reinsurance risks underwritten around the globe. He said that ILS players do not generate the same number of jobs as reinsurers, something which is true.

There is certainly a gap between the size of a workforce in a traditional reinsurance company and the number of workers at an insurance linked securities (ILS) fund, or reinsurance capital manager, of a similar size or capacity. Traditional reinsurers can have hundreds, the very large ones have tens of thousands, of employees, while the largest ILS manager in the world Nephila Capital (with $10 billion of assets under management) has perhaps 50 to 60.

There are traditional reinsurers with hundreds of employees who command similar amounts of capacity as Nephila Capital and herein lies one of the efficiencies that ILS and third-party reinsurance capital enjoys, helping it achieve the lower cost-of-capital we often discuss.

However, it is not all doom and gloom in the reinsurance jobs market and nobody expects the sector to become solely dominated by ILS managers, with lean teams and smaller headcounts, anytime soon. There is evidence of new reinsurer start-ups emerging, some of which will follow traditional capital models, while others will use alternative course of capital. Some of these will have large headcounts due to the focus of their business models.

The bigger threat to reinsurance sector jobs lies in technology. The sector has a history of being paper based and has been slow to adopt new technologies historically. As technological advancement speeds up there will be an increasing number of jobs which can be performed by software in the insurance and reinsurance industry, as there are in every business sector.

ILS and third-party capital management will result in some lost jobs, that’s a certainty, as new business models emerge with direct investors and no shareholders to support. Also ILS managers which solely invest in catastrophe bonds can be extremely lean operations, as they are investing in packages of risk which have been modelled externally, so it is natural that a lower headcount is required than a reinsurer which would have to go through the full underwriting process itself.

But at the same time these new business models, which are emerging from the ILS market, will require supporting services and generate jobs in other areas such as investment banking, fund administration, risk modelling, actuarial services and more. So some of the lost jobs can be replaced, although the location of replacements is not guaranteed to be where reinsurance sector jobs are lost.

In Artemis’ opinion the real threat to reinsurance sector headcount begins when technology and ILS capital are combined and new ways of underwriting supported by the latest technologies and use of (big) data emerge. This kind of advancement may not be as far off as some think and it may not be the ILS managers which adopt these technologies first, there are traditional reinsurers actively working on technology initiatives which will naturally  result in cuts to their headcount if successful.

The threat to reinsurance market jobs at small domiciles from the growth of ILS is a fact, but domiciles need to ensure that they remain attractive places to do business for both traditional and alternative reinsurance capital as well as the full range of support industries. They also need to make their business environments conducive to entrepreneurs and start-ups, as we can expect to see more innovation in reinsurance in years to come leading to new business models we haven’t yet thought of emerging.

The fact remains that there is a job gap between a traditional reinsurance company and an ILS fund or reinsurance capital manager at the moment.The efficiencies inherent in managing sombody else’s money, over having equity shareholders, is just one factor. There is also some efficiency to be had from a focus predominantly on well-modelled risks. Also ILS managers have been very good at making use of external service providers instead of bringing services in-house, something a new business model can give companies the luxury of exploring.

Domiciles like Bermuda are not the only ones where jobs are perhaps less secure due to the change the reinsurance market is undergoing. Markets like Lloyd’s of London, the London insurance hub and Zurich will also be exposed as the shakeout from recent and ongoing trends continues.

However, as the ILS market grows, matures, takes on more collateralized underwriting, emerging market perils, casualty risks and unmodelled risks, it will require ever greater levels of underwriting skill, analysis and support. This should ensure that as the assets under management of the ILS sector grows, so will its headcount needs and the headcount of key service providers to the sector as well.

Whether this will be sufficient to narrow the job gap between ILS and traditional reinsurers is hard to say. The reinsurance market is currently feeling pressures which could cause considerable change in the way business is done in years to come.

However, with change also comes opportunity to innovate and build new business models and the successful ones will be those who embrace this change and opportunity and work out how to make it benefit them.

When any sector undergoes structural change one of the innevitable outcomes is likely to be an increase in efficiency. The important thing is to work out how to capitalise on an innovative and growing sector and sometimes efforts are best focused on supporting what is new rather than maintaining the status quo.