Alternative capital “an innovative force within insurance” – Aon

While alternative capital has tested the marketplace, fundamentally changing the risk transfer business and been said to have disrupted the risk-to-capital value-chain in recent times, Aon says it’s important to remember that it’s provided an innovative force within insurance.

According to Aon Securities, a subsidiary of Aon, alternative reinsurance capital now stands at an estimated $75.1 billion, growth of more than 10% on last year as the insurance-linked securities (ILS) space continues to cement its place in the re/insurance industry.

The rise of ILS capital alongside the increased capabilities and accessibility of improved data & analytics, and technology, has caused brokers, insurers, reinsurers, and other capital providers to rethink and remodel in order to remain relevant, and essentially remain important to the risk value chain.

The risk value chain continues to evolve in response to disruptive forces that present both challenges and opportunities for re/insurance market participants.

“This value chain has been set in the insurance industry for a long time, but never has the industry seen so much potential disruption to the ways that these linkages have traditionally been delivered,” explains Aon, in its recent Global Insurance Market Opportunities report.

The linkages Aon is referring to are; the customer, claims, capital, investment, and paper, which the firm outlines as the five links to the insurance value chain.

One element of the risk value chain that Aon explores in its report is innovation, highlighting 228 companies that are challenging the traditional insurance and reinsurance industry model, in some form or another.

Of these companies, 25 are related to firms that are providing alternative capital, explains Aon.

“Alternative capital providers dominate the financing. These are the hedge fund reinsurers and ILS funds that have emerged over the last decade… it is important to remember the level and impact of alternative capital as an innovative force within insurance,” says Aon.

The influx of alternative reinsurance capital has altered insurance purchasing and brought an increased supply of capital and competition to the marketplace, explains Aon.

Furthermore, as ILS funds, managers, and investors become more understanding of the exposures within the insurance and reinsurance industry, their willingness to get closer to the original source of risk and assume a more diversified range of business, has spiked, a trend that has disrupted the value chain.

With alternative capital increasingly looking to jump the value chain, it actually reduces their need for intermediaries such as the reinsurers, and also insurance and reinsurance brokers, such as Aon.

Alternative reinsurance capital is just one disruptive, and/or innovative force within the insurance value chain, but it highlights how intermediaries and other parts of the value chain must be innovative in the current market environment in order to remain relevant.

“In last year’s study, we discussed the concept of “Uberization” and its various definitions. One definition – relevant to the insurance industry – is the introduction of increased supply competition. As Uber Technologies stimulated driver supply during peak-demand periods through the use of “surge pricing,” so has the influx of alternative capital been disrupting the insurance and reinsurance markets in myriad ways,” explains Aon.

The report looks to explore potential weak links to the value chain, and highlights that capital costs almost 20% of total expenses. Underlining the potential cost efficiencies that can be achieved through the utilisation of alternative capital, Aon explains that the ILS space is an area “where the industry has embraced many new innovations over the last 25 years.”

“And over that time period we have seen substantially lower costs for risk-bearing capital, leading to lower costs for insurance and reinsurance buyers – led by the decreases in property catastrophe reinsurance,” continued Aon.

The majority of reinsurers in the space have now embraced the abundance of third-party investor backed capital, utilising it to supplement their balance sheets and adopting varied business models to incorporate its features in the hope of reducing costs.

The value chain will undoubtedly continue to evolve as the risk transfer landscape changes, technology creates new ways of accessing and purchasing risk, and new forms of capital look to disrupt and jump the value chain, accessing risk as close to the primary source as possible.

The challenge for intermediaries and the entire value chain is to remain relevant, and invent in order to work with the innovative force of alternative capital, and other forces, such as technology and data & analytics, that are growing in importance throughout the risk transfer value chain.

Also read:

– On accelerating the transport of risk to capital (ILS + Insurtech).

– ILS enlarges reinsurance, complements it, says SCOR. But is it in contest?