Alternative reinsurance capital to pressure casualty: Morgan Stanley

Pricing in the casualty reinsurance space is expected to increasingly come under pressure owing to the presence of alternative capital, but it’s impact is unlikely to be as influential as seen in the property cat space, say analysts at Morgan Stanley.

“The increasing supply of alternative capital will pressure casualty re pricing. However the impact is unlikely to be as acute as in property cat (down 30%+ cumulatively in 2 years) as there are limited joint ventures and the casualty re market is much broader,” explains Morgan Stanley.

The persistent influx of third-party reinsurance capital, which adds to the growing base of traditional capacity providers, has largely focused on property catastrophe business, due to easier entry, well-modelled exposures and the all-round better understanding of the risks.

But as competition has intensified and returns in the property cat sector have fallen below desirable, and in some cases manageable levels, the last few months in particular have seen alternative capital’s rate of growth slow somewhat.

In response to the deterioration of margins, alternative capital, or insurance-linked securities (ILS) participants have started to look into other, less competitive and potentially more profitable business lines, with the entry into casualty reinsurance lines seemingly gaining momentum.

“It is a more difficult adoption in casualty re but partnership models between established re/insurers and alternative asset managers is gaining traction,” says Morgan Stanley.

Joint ventures such as ACE and Blackrock, XL and Oaktree, Arch Capital and Highbridge, notes Morgan Stanley, are examples of alternative reinsurance capital entering the casualty arena, through hedge fund or investment-oriented reinsurance ventures, and it’s possible this could become more common in the future.

The joint ventures noted do utilise third-party reinsurance capital to access longer-tailed, casualty reinsurance business, by adopting a hedge fund style reinsurance model, which is backed by third-party investor capital, meaning investors gain access to a diversified range of risks and asset classes, casualty reinsurance included, while the asset managers get the more permanent capital inflows.

But it’s not just the hedge fund reinsurers that are facilitating the entry of alternative reinsurance capital into the casualty space, as evidenced by Credit Suisse Asset Management (CSAM) and sub-advisor ILS Investment Management (ILSIM), which established a unique property & casualty (P&C) run-off portfolios fund in 2014.

The P&C Fund provides ILS strategies that enable investors’ access to longer-tailed returns of discontinued books of P&C business, business that is typically more challenging for ILS investors to come across and engage with, as opposed to the more typical peak catastrophe exposures.

Currently, this is the only fund of its kind, but as modelling in the casualty space improves, and the sophistication and willingness of ILS market players to access the returns of the casualty reinsurance space grows also, more funds, or structures of this nature could be a feature of the market moving forward.

Looking to the upcoming, key January 1^st 2016 renewal season, Morgan Stanley states “companies are expecting flat to slight down casualty re pricing.”