Alternative capital here to stay but needs to broaden reach: Analysts

by Artemis on November 18, 2015

Managing Director and senior property casualty insurance analyst at UBS Securities LLC, Brian Meredith, has said that alternative capital isn’t going to replace the traditional reinsurance industry anytime soon, but industry experts said that it must expand on its current coverage base.

Speaking at the 2015 Bermuda Reinsurance Conference sponsored by Standard & Poor’s and PwC Bermuda, industry leaders, experts and executives discussed the impact of alternative reinsurance capital in the marketplace.

“Alternative capital is here to stay,” said John Hall, Managing Director and senior insurance analyst within Wells Fargo Securities LLC’s equity research department, and “for alternative capital to expand, I think it needs to move beyond the kinds of coverage it’s in now.”

A constant discussion surrounding the growing presence of alternative reinsurance capital in the overall marketplace is its focus on easy-to-model, well-understood, competitive risks, most notably the property catastrophe sector.

But a lack of adequate modelling capabilities in other business lines, like casualty or liability exposures, has limited its impact outside of the already competitive business areas, ensuring it helps to drive down rates and drive up competition.

Since third-party capital really started to gain traction and represent a significant share of the global reinsurance industry, catastrophe losses have been relatively benign, meaning that it’s largely an untested model, which in turn has raised concern for some in the space about its permanence post-event.

The panelists, however, all share the view that it’s here for the long haul, but highlighted that until it broadens its reach and leverages increasing underwriting expertise, it poses less of a threat to traditional reinsurance companies that some in the sector believe.

Meredith underlines this point; “For anybody saying that alternative capital is going to take over the reinsurance industry, I don’t think that’s going to happen anytime soon, because you still need the underwriting expertise.”

Interestingly, and somewhat opposing Meredith’s final point here on underwriting expertise, Willis Re Chairman, James Vickers, recently cited how insurance-linked securities (ILS) investors tend to now be more disciplined than some traditional players.

Furthermore, as the use of ILS structures and capital grows so to will the talent, expertise and sophistication of the market, which in turn should help it access risks outside of the property cat arena, and into emerging, underserved regions and perils.

Although the panelists stress that it’s unlikely ILS will over take the reinsurance industry anytime soon, it’s now widely expected across the sector that the convergence between the insurance, reinsurance, and capital markets will continue, serving to further blur the lines between traditional and non-traditional risk transfer capacity.

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