Reinsurance; it’s all about the capital efficiency

It’s not just insurance-linked securities (ILS), capital markets players and investment conglomerates that can enter the reinsurance market boasting a reduced cost-of-capital and lower return requirements than incumbents. Even a traditional insurer can follow this approach.

One of the key messages coming out of this years Monte Carlo Reinsurance Rendez-vous is the subject of capital efficiency.

In a reinsurance market where almost everyone, including the core business model, is coming under pressure, maintaining efficiency in your capital and capacity is becoming increasingly important to players, as they navigate the challenging market environment.

Of course insurance-linked securities (ILS), the capital markets and alternative capital play into this, as companies bring new financing into their businesses to reduce cost-of-capital and benefit from efficiencies, but the traditional insurance/reinsurance business model is far from dead, it just needs a rational approach with capital efficiency front of mind.

Enter UnipolSai, Italian primary insurance company, which is now launching a reinsurance company as it seeks to leverage the diversification that it will offer, in order to operate the reinsurer at a reduced cost-of-capital.

That means UnipolRe Limited, the name of the Dublin domiciled reinsurance company, can operate looking for just a single-digit return on equity from the reinsurance underwriting operations, a low figure that should enable it to compete strongly with incumbent traditional reinsurers.

UnipolRe, which is launching with EUR500m of assets, was actually the group captive reinsurance vehicle for UnipolSai since 1998, but it has now had its mandate changed to target third-party reinsurance business as well.

A.M. Best said that UnipolRe has “an excellent level of risk-adjusted capitalisation, which is forecast to continue in 2015 and subsequently, as the company establishes itself as a European third-party reinsurer.”

So UnipolRe is not starting from afresh, instead it perhaps will continue to provide a level of internal reinsurance as well. By accepting third-party business too, UnipolSai can likely benefit from additional capital efficiencies and diversification, between its own business and third-party reinsurance underwritten.

UnipolRe will look to underwrite business for small and mid-sized cedants, covering classes in the third-party liability space, amongst other lines, on both proportional and non-proportional basis’.

Marc Sordoni, head of reinsurance for the Italian insurer, commented in a press release; “Because of the obvious reasons for our formation, our return on equity requirements are very different to most other comparable reinsurers. We are seeking a single digit return, well below the much higher expectations of most of the market players.”

A statement from the company also said that the; “Main goal is diversification, the new reinsurer is seeking only a single digit return on the business it writes, a stark contrast to the standard double digit returns expected by many investors of recently established reinsurers.”

UnipolSai is clearly aware that the launch of another reinsurer, in such a challenging market environment, needs to have an edge or angle that enables it to reduce its cost of underwriting capital allowing it to accept a lower return on equity.

UnipolRe will do exactly that and could become a disruptive force in time, as the business grows and if UnipolSai wants it to.

Other primary insurers could also look to do this. Turning a group captive into a reinsurance vehicle, to aid diversification against the primary business, add income and also diversify out the risks within the vehicle as well.

Yet another clever strategy in a challenging market, showing that the doors to the reinsurance world are not closed if you can wield a greater capital efficiency than others, just like the insurance-linked securities (ILS) market and other players that appreciate the diversifying nature and returns of reinsurance business do.

Read all of our Monte Carlo Rendez-vous 2015 coverage here.