Over the next ten years global reinsurers will likely increasingly act as service providers to capital market or ILS investors, with operating units providing transformer or fronting services, as access to efficient capital becomes increasingly vital.
In a recent A.M. Best reinsurance webinar, in which the rating agency gave its view on the prospects for the market in advance of the Monte Carlo Rendez-vous, A.M. Best Vice President (VP), Robert DeRose gave his thoughts on where the reinsurance sector could be heading over the next decade.
“I think that reinsurers also will have a greater transformer capital markets operation,” said DeRose, referring to the use of insurance and reinsurance transformer vehicles increasingly being utilised in the reinsurance, catastrophe bond and insurance-linked securities (ILS) space.
Hannover Re, Munich Re and Swiss Re, three of the largest global reinsurance companies in the world, have all facilitated the transformation of risk to the capital markets by acting as the fronting entity or transformer of risk themselves, and DeRose feels suggests trend will spike in the years ahead.
“Being able to access capital and match risk to the capital, I think that the reinsurers are going to play a larger role in that and I think having the scale, in terms of product and in terms of geographic, are going to be key,” continued DeRose.
Reinsurers provide the glue between capital market investors, such as some of the dedicated catastrophe and insurance-linked securities (ILS) investment funds, and the insurance and reinsurance markets risks.
As investors increasingly look to enter the space and gain access to quality portfolios of risk, the major global reinsurers stand in a strong position to win this business, hence strengthening these transformer and fronting type services makes a lot of sense.
Catastrophe bonds and collateralized reinsurance agreements are the most common examples of structures which commonly make use of transformer or fronting arrangements, to enable investors easier access to risk.
Facilitating the transformation and fronting of risk can be a key growth area for reinsurers around the world, highlighted by the extensive capital markets operations undertaken by Germany’s Hannover Re., Munich Re with its focus on the new Capital Partners unit and Swiss Re with its ILS and capital markets specialist unit.
It also enables reinsurers to build relationships with ceding companies, helping them to access the capital markets, ILS managers and institutional investors, helping them to access the risk, as well as bringing in some additional revenue through fee income.
Furthermore, insurance-linked securities (ILS) funds, ceding firms and other institutional investors can benefit from dealing with large, global reinsurers, like Hannover Re, Munich Re and Swiss Re, as their expertise, industry knowledge and skillset can be utilised to achieve a cost-effective solution.
Investors and ILS managers also benefit from leveraging the rating that a major reinsurer has, if taking advantage of fronting services that some provide, an important aspect when trying to access large cedants who want to see a rating against their reinsurance counterparts.
DeRose added; “The capital markets are going to want to play with the big players because then they’re going to see that that’s where the opportunity to access the business really and truly lies.”
Catastrophe bond issuance, collateralized reinsurance and other alternative risk transfer solutions have witnessed impressive growth in recent times, and as the major reinsurance firms continue to reap the benefits of enabling investors easier, cheaper access to ILS and capital markets capacity, others will surely follow suit over time.
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