Third-party capital could grow to 30% of Catlin business: Jardine

Paul Jardine, the Group COO of insurance and reinsurance business Catlin Group, said that as the firm increasingly underwrites business against ILS and third-party capital he could foresee it becoming as much as 30% of the Catlin business.

Jardine was speaking yesterday at the ILS Bermuda Convergence 2014 event, held in Hamilton Bermuda. A keynote speaker at the event, Jardine gave an overview of how he sees the changing industry, with new capital a real focus and how it is actually a positive and something that the re/insurance industry needs more of.

Jardine explained that there is huge potential for growth in insurance and reinsurance exposures, resulting in an increasing need for more capacity and capital, calling the current environment a “World of opportunity” for the re/insurance sector.

The use of new financial instruments in reinsurance has “developed incredibly” he said, citing it as a positive for the industry and its clients. ILS has been a contributing factor to this, bringing new products and structures to the market which have helped cedents to tap the new capital and become better protected.

Jardine expects the growth of reinsurance and ILS will continue and ILS will become increasingly a mainstream option for cedents. “What we have now is much more than just cat bonds,” Jardine explained “I see further growth, further money coming into the marketplace.”

Jardine did question whether the growth of indemnity triggers could result in an increase in arbitration in ILS, also whether risk concentrations could be an issue. However he noted that the spreads are still sufficient to cover expected loss costs, which should result in further growth.

He called what we have today a “Vibrant and mature ILS market with more investors waiting to come in.”

Jardine then said that Catlin is a “net winner” thanks to the cheaper cost of reinsurance capital, which is assisted in many ways by the entry of third-party capital and ILS.

Jardine suggested that we need this additional capital in insurance and reinsurance, in order to cater for the extreme growth in demand that he foresees. He expects the use of new capital will expand in the market; “I believe that we will see a broadening of coverage available. We need that capital.”

He said that traditional insurers and reinsurers cannot grow retained earnings quickly enough in order to meet the demand for capacity in the growing economies of the world. “I see a massive increase in demand and to satisfy that demand you need capital from whatever source you can get it,” he explained.

Jardine said that there is an enormous demand growing for this industry. Severity of disaster claims keeps growing, even while the frequency of events has fallen in recent years. That requires more capacity to satisfy demand and protect the newly emerging concentrations of risk.

“All of the new capital that’s in the industry, we may have excess capacity over the next one, two or three years, but we really do need an industry with more capital to demonstrate the value of insurance to society as a whole,” Jardine continued.

On Catlin and its own use of third-party capital, Jardine said; “We enter next year with broadly 15% of our business being written against third-party capital.  We see it as an opportunity, we see it in some ways as a necessity.”

The traditional reinsurance model is changing and those companies that change to embrace the different capital structures that are available may be the winners, as there will be both winner and losers. Using somebody else’s balance sheet to help you grow is a sensible strategy, Jardine explained.

Jardine said that there are risks with the current softer reinsurance market environment and it is important not to end up in a spiral of risk being reinsured within its own sector. However this is also a positive for ILS as it allows the reinsurance sector to share its risks with the capital markets.

There is work to do for the insurance and reinsurance industry to demonstrate its value and that it can make good on promises to pay that are given. “We need to demonstrate as an industry that our products have a real value to society,” Jardine continued.

Jardine said that some companies need to consider their business models as the industry changes and that becoming warehousers and distributors of risk may be an option that makes sense in the current climate for some of the most pressure companies.

Third-party capital offers real advantages under certain market conditions, Jardine said; “In the hardest of markets you may need additional capital from third-parties to expand rapidly, because it gives you speed to market. Third-party capital gives you a real lead in to a post-event situation.”

After an event Jardine said he’d expect to have more third-party capital. Also in a softer market using more third-party capital could be attractive, he said, adding that Catlin could take its third-party capital to 25% to 30% under the right market conditions.

However the proportion of third-party reinsurance capital to balance-sheet capital Catlin uses could fluctuate depending on the market environment and it is the periods between soft and hard markets when it may be more attractive to write more business to your own balance-sheet, Jardine explained.

So Catlin looks destined to have a capital agnostic approach to leveraging ILS and third-party capital alongside its balance-sheet. In the current market this is a pragmatic approach and Catlin clearly see the advantages of using lower-cost capital both for its own reinsurance needs and as a way to grow and underwrite more business.

As the ILS story continues to evolve this strategy is likely to become much more dominant among larger re/insurance players and as a result capital market investors look set to grow their share of the overall reinsurance market.