Insurance buyers look to cat bonds, collateralized alternatives: Marsh

by Artemis on December 1, 2014

For years we’ve written that insurance companies increasingly look to alternative sources of reinsurance capacity, from insurance-linked securities (ILS) players and the capital markets. But now, according to Marsh, insurance buyers are looking at alternatives too.

The global insurance and reinsurance market is awash with capacity, both traditional and non-traditional, resulting in buyers market conditions right the way through the insurance, reinsurance and retrocessional reinsurance buying chain.

As well as record levels of available capacity, it would seem that knowledge and an understanding for insurance-linked securities (ILS), catastrophe bonds and other collateralized forms of coverage has spread as well. Historically, collateralized re/insurance or ILS products have typically been of interest to insurers or reinsurers, but now according to Marsh interest is being shown by insureds as well, as insurance buyers are now aware of the broader options that could be available to them.

“With conditions remaining favorable to buyers, insureds are researching alternative risk management solutions, including catastrophe bonds and collateralized insurance solutions — and many insureds are also seeking to secure multiyear policies to lock in currently low rates,” commented Duncan Ellis, Marsh’s US Property Practice leader, in the firm’s latest quarterly briefing on the global insurance market.

There has long been an expectation that corporates will increasingly become buyers of ILS or alternative market products and if the knowledge of these options is spreading further in the currently soft market, it could eventually translate into more business lost by the traditional markets.

Marsh estimates that $50 billion of new capital has been invested in the reinsurance market in the last two years. This has to be both investments in traditional reinsurance as well as in ILS, as ILS alone has not grown by that much in just two years. The increase in reinsurance capacity is, Marsh says, reflected in the fact that insurance capacity is now on the rise too.

However, while capacity is rising it is not being put to work, resulting in over-capacity and a buyers market right the way through the re/insurance buying chain.

Marsh’s report explains; “While larger global insurers have made available additional capacity in all major product lines, and some true new capacity has emerged, the actual deployment of capacity has remained relatively consistent.”

The most dramatic change, says Marsh, is buyers willingness to access capacity globally now, which perhaps puts paid to some markets hopes that a local approach would enable them to avoid the worst of the market-wide softening.

Of course the capacity available in the re/insurance marketplace is helping insurers, with the cost to transfer risk much lower than even two years ago. This is driving more competition among insurers, according to Marsh.

“Primary insurers have been able to become more competitive due to reductions in the cost of treaty reinsurance as a consequence of increased levels of reinsurance capacity and a lack of natural catastrophes,” said Andrew Chester, CEO of Bowring Marsh, Marsh’s specialist international placement unit.

It seems that the reduction in reinsurance costs, which benefits insurers, is now enabling them to sell insurance coverage more cheaply. But at the same time, insureds are increasingly gaining knowledge of alternatives and ILS options, which in time could end up taking business away from traditional insurance players.

This could be another sign that the disruptive effect that efficient capital has had on the reinsurance market, may also in future be seen more broadly across the insurance market. With insurers now keen to raise their own efficiency, to lower their cost-of-capital and take on new analytics to increase their RoE’s, this all points towards the efficiency of capital becoming increasingly important right across the insurance-reinsurance value-chain.

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