Reinsurance capital accelerates. Too early to say what the future holds

by Artemis on June 16, 2014

The rate of change is something often discussed here on Artemis, with the influence of new, or alternative, reinsurance capital sources and capital market investors clearly having a marked impact on the global reinsurance market over the last few years.

The rate of change has certainly accelerated in recent years, with the influence of the capital markets now perhaps the most discussed issue in re/insurance. You cannot attend a conference in insurance or reinsurance these days, without at least one speaker or panel discussing insurance-linked securities (ILS) and alternative reinsurance capital and asking whether it is a disruptive force or a temporary trend.

At today’s Verisk Executive Summit and Risk Symposium, held in London, a panel of re/insurer CEO’s discussed the critical issues facing the market in 2014 and naturally ILS and the capital markets received a great deal of attention.

Russell Higginbotham, Swiss Re’s UK Chief Executive Officer, said that in his view alternative reinsurance capital and ILS is not going away and that there are plenty of capital sources adding to the capacity of the reinsurance market at this time.

Julian James, European President of Allied World Assurance Company (Europe) Limited, said that it is undoubted that new capital is making a big difference in the global reinsurance market. The new capital is having a real impact, particularly in the acceleration or speed of capital as it can now move in and out of risks (and the market) much more quickly than ever before.

So the speed of capital is accelerating in a time of accelerating change, according to these CEO’s. However Higginbotham cautioned that it is still too early to say how this trend will play out, as alternative capital and its interest in re/insurance is still developing.

James, of Allied World, said that his firm does not see the new capital as a threat. Rather he sees it as a developing trend of capital being deployed in different ways into re/insurance and capital which has different motivations for entering the sector. He noted that Allied World itself both invests in ILS vehicles as well as uses ILS and alternative capital for its own reinsurance needs.

Another CEO, Andrew Horton of Beazley plc, said that the accelerating trend of ILS and alternative capital could result in some areas of the reinsurance market becoming commoditised, which could force companies like his to move onto new lines of business, leaving ILS to take the lions share of certain markets.

Beazley, Horton explained, has not yet entered the ILS space itself. At the moment Beazley is not sure that there is an entry point for it, said Horton, adding that there are so many firms already in ILS. However the availability of capital leaves plenty of options for a firm like Beazley and Horton expressed amazement that in a reinsurance market with falling rates, his firm could raise as much new capital as it wanted, despite the fact it might struggle to deploy it.

Higginbotham said that he believes that ILS has been responsible for much of the decline in reinsurance pricing seen in recent months, saying that price is a big factor in its uptake. He cautioned that it remains to be seen how ILS and alternative capital will react to losses, saying that it has yet to be seen tested by a significant claims environment and some may be surprised how that plays out.

Julian James sees an additional opportunity for insurers and reinsurers with large customer bases to get involved in ILS and alternative capital as conduits for capital to access risk. Those with large customer bases stand in a good position to control distribution, James said, allowing them to leverage ILS rather than purely be disrupted by it.

It’s important for those in the insurance and reinsurance industry to remember that change is not always a negative and as the ILS and alternative capital trend continues to play out opportunities will arise. Of course as the pace of change accelerates it is equally important for them to remember not to be left behind.

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