Utilising a rated reinsurance model that’s backed by third-party investor capital, as seen with Credit Suisse Asset Management’s (CSAM) Humboldt Re and Kelvin Re, adds efficiency without losing the strategy and spirit of insurance-linked securities (ILS), says Niklaus Hilti.
Being a rated reinsurance company holds benefits to investors and clients alike, as do the structures and strategies of the ILS market, leading to the establishment of hybrid investment strategies based on the traditional reinsurance model, but using the willingness and capacity of third-party investors.
Speaking at the A.M. Best 2015 Insurance Market Briefing, Europe, held in London recently, Niklaus Hilti, Head of Insurance-Linked Strategies at Credit Suisse Asset Management, discussed the firm’s adoption and utilisation of a rated reinsurance model backed by third-party capital.
“You know it’s increase the efficiency but not losing the spirit and the strategy of ILS,” said Hilti.
Adding; “We said probably a reinsurance company which is rated with a clear, and lets say ILS driven strategy, combined with the much more efficient set-up of a rated balance sheet, opens you even a wider range of degrees of freedom, and I think that is really what we try to achieve here on behalf of our investors.”
As the ILS market, its participants, structures and strategies have evolved its growing share of the overall global reinsurance market capacity; its capital is further being deployed into innovative, new and sometimes hybrid risk transfer vehicles.
Hilti notes that the ILS market has a lot of “very clean structures” and he views the strategies within the sector the same way. However, while the capital base and sophistication of the entire ILS landscape is growing and maturing, Hilti notes that certain aspects of the sector are perhaps still too confined, elements that can be avoided with a hybrid, rated reinsurance model.
Regarding the confinements of the ILS space, Hilti said; “Already reinstatement is difficult, if you have bottom layer it’s a completely different economic ratio you get whether you have to collateralize it or not, then you have the hot topic of locked collateral.”
Furthermore, and drawing on a debate that’s been around since the influx of alternative reinsurance capital became a meaningful market force, is the benefit of a permanent capital base through a rated reinsurer, relating to fears that after a loss event the wealth of institutional investors will disappear, capital in hand.
Permanent capital, says Hilti, “for the investors I think has a lot of advantages.”
In fact Hilti underlines several advantageous reasons why CSAM chose the hybrid reinsurance model, from an investor point of view and beyond the permanence of capital.
“From an investor perspective our thought process was really that we believe on the rated reinsurance company you can achieve a similar returns for, lets say an ILS fund has 4% above LIBOR, a rated reinsurance company would deliver the same return, I think on the rated balance sheet you would get less tail risk than on an ILS fund,” said Hilti.
The use of a rated reinsurance model also enables greater access to the risk, explains Hilti. Rated reinsurers can currently access a more diversified range of reinsurance programmes as some companies will only transact with a rated entity.
“And I think with such a platform you actually have the ability to access that risk, and I think that’s a positive thing,” said Hilti.
And, according to James Vickers, Chairman of Willis Re and another speaker at the A.M. Best event, it’s not just the investors that benefit from a rated reinsurance model approach.
“From the clients’ point of view, it’s the sheer administrative efficiency of being able to deal with somebody who is a rated reinsurer,” advised Vickers, continuing to highlight minimal paperwork and other issues that can arise, or hoops that must be jumped through when dealing with a reinsurance vehicle that isn’t rated.
Vickers also said that in his view, “this is the way the market is going to go. We are going to end up with traditional reinsurers and certainly the larger, better organised ILS funds will look fairly similar, they will just be serving slightly different capital bases and the way they go about it.”
Vickers warns that the result of this could see a surge in merger and acquisition (M&A) activity among the smaller ILS funds, or possibly lead to more re/insurers purchasing a large ILS fund, as Markel did with CATCo Investment Management earlier this year.
Speaking earlier at the A.M. Best event, the ratings agency’s Managing Director of Analytics, Stefan Holzberger, also noted the shift towards a rated reinsurance model that encompasses the ILS spirit.
“You’ve got ILS, you’ve got protected cells, hedge fund reinsurers, and collateralized reinsurers, slowly evolving their business model to perhaps migrate at least some of their business opportunities towards the more conventional, rated platform, which of course is less capital-intensive than the collateralized model,” said Holzberger.
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