Covering “grey areas” a strength of traditional reinsurance: John Charman

Reinsurance companies can provide policies that cover the “grey areas” of claims and this is one of the strengths that John Charman, CEO and Chairman of Endurance Specialty Holdings, sees as a reason the traditional business model will not go away.

Speaking this morning during a briefing alongside Sompo Holdings President & CEO Kengo Sakurada to discuss the recent announcement of an acquisition of Endurance by the top-three Japanese insurance player, Charman discussed his views of the changing reinsurance marketplace.

He discussed why he feels Endurance has been successful in reinsurance, the importance of differentiation and his thoughts on the difference between traditional and alternative capital.

“There are a lot of mature reinsurance companies in the world that are inefficient and have not really provided the products that cedents and the market really need,” Charman explained.

“I still firmly believe in the future of the reinsurance market,” he said, before going on to explain that now the reinsurance market is one of multiple capital sources, from traditional to third-party or alternative.

Charman said that he believes traditional reinsurance capital is here to stay because; “The reason why traditional is valued so much is the longstanding relationship between the reinsurer and the client that cover multiple business lines.”

“Third party capital vehicles tend to issue reinsurance policies that are black or white, no grey areas. In our industry claims often have grey areas. Those third-party capital vehicles are not allowed to settle in those grey areas,” he continued, adding “That is one of the great strengths that I do not see changing.”

Charman of course controls a pool of third-party capital which is managed on behalf of institutional investors by the Blue Capital Management Ltd. ILS unit. Endurance leverages this in property catastrophe lines of reinsurance and retrocession, to offer clients fully-collateralised protection.

Most of the ILS market is of course now covering more grey areas, in terms of being indemnity based which opens some, but unmodelled risks remain less prevalent in ILS than traditional reinsurance markets.

With ILS backed by investors, the ILS fund managers are careful not to assume too much unmodelled risk as their underwriting capital is not technically their own.

Of course, a large reinsurance firm like Endurance is using underwriting capital sourced from its shareholders, but they choose to make underwriting decisions that cover “grey areas” as well.

No matter the level of underwriting expertise you have, grey areas can of course come back to haunt you, as the reinsurance market has witnessed in the past.

We would tend to agree that traditional reinsurance capital will remain relevant. However in years to come third-party balance sheets may become more frequently used, larger, and the reinsurer owned balance-sheet may shrink to be deployed more on these specialist and grey area risks.

As ever, efficiency of capital will be key and certain risks are most suited on certain types of capital. Not every risk is right for the balance-sheet and not every risk is right for third-party capital. Divisions will continue to exist, but the complementary nature of the two capital sources is likely to increase in the reinsurance business model.

Also read:

– Sompo Japan acquires Endurance for $6.304 billion.

– Blue Capital: No changes due to Sompo acquisition of Endurance.