Alternative capital evident in mid-market commercial risks: WTW

by Artemis on November 8, 2016

Alternative reinsurance capital providers continue to expand their remit, reaching and deploying capital ever more deeply into the insurance and risk transfer market and now being seen in the middle market commercial insurance space.

While alternative capital is now widely seen across the reinsurance market in an increasing range of risk classes, having long since expanded out of its original property catastrophe niche, its progress into insurance risks has been seen mainly in larger accounts.

Broker Willis Towers Watson (WTW) has noted a steady expansion of reach by alternative capital though, saying in a recent commercial insurance market report that alternative reinsurance capital providers are now being seen in mid-market commercial risks as well as large accounts.

It’s also being seen in delivering parametric commercial insurance products to mainly large accounts, a trend that has been in evidence for a few years but that is now gaining pace.

“To a limited extent, alternative market capital is being used for primary coverage in the large account space, and now we are seeing evidence of it in middle market space and in parametric trigger products,” Willis Towers Watson explains.

As WTW says, use of alternative reinsurance capital from insurance-linked securities (ILS) funds and investors is still limited in commercial insurance markets, but it is an area where growth is anticipated, as the ILS market finds new ways to bring its risk capital closer to the ceding customer.

The middle market space in commercial insurance is defined as organisations with annual revenues below $1 billion, which is a very large sector and one which alternative capital and ILS now seems to have an opportunity to expand into.

The commercial insurance market is becoming increasingly similar to the global reinsurance market, with WTW seeing the “strong supply of marketplace capacity as a key driver in market conditions.”

Ample capacity, including the increasing amount coming from the capital markets into commercial risks, will help insurers as well, enabling them to better absorb increased losses and events such as hurricane Matthew without any impact on future pricing, WTW noted.

Of course the commercial property insurance market is the area where ILS and alternative reinsurance capital is likely to have the largest impact, with WTW pointing to an “ongoing declining rate trend” which the broker says “continues.”

In fact, rate declines could be quite steep looking forward to 2017, with WTW suggesting the following for commercial property markets.

“Catastrophe-exposed programs, having led the softening cycle last year, continue to lead the declines. Property rates are expected to decline 7.5% to 10% for companies without significant exposure to natural disasters and 10% to 12.5% for those more exposed.”

However, insurance companies and the large reinsurance companies which also target primary commercial risks, are all looking for growth right now as well. This suggests that the commercial space could become as competitive as we’ve seen in reinsurance, with the resulting softening effect expanding.

When discussing the hard and soft market cycle that has historically been seen, Head of Broking at Willis Towers Watson North America Matt Keeping explained; “Those days may never return. The fundamentals of the industry, the forces that guide the flow of capital, may have changed sufficiently that things may really be different now.”

The expansion of efficient capital from ILS funds, investors and the capital markets into commercial insurance risks and its spread into middle market accounts, particularly in catastrophe exposed property, is only going to ensure that the chances of the market bouncing back to the cycles seen in the past are even lower.

As alternative capital expands into these commercial markets, and triggers such as parametrics gains increasing exposure and popularity, alternative capital will gain greater access to the risks it seeks, bringing capital efficiency to ceding companies and reducing intermediation costs across the marketplace.

These are positive effects, but the competitive backlash could still result in a market that sees steady softening for some years to come. Add in the effect of increasing digitalisation of risk transfer through insurtech start-ups and processes and the eventual effect should be that risk transfer for commercial insurance buyers gets cheaper.

That’s positive for everyone, although as we saw in reinsurance markets some threatened incumbents may not see it that way immediately.

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