Alternative reinsurance capital: “Permanent fixture” continues to evolve

by Artemis on November 23, 2016

Third-party reinsurance capital continues to search for ways to get closer to the original source of risk as it’s become a permanent and influential force within the global reinsurance market, according to industry experts.

Speaking on a panel co-hosted by ratings agency Standard & Poor’s (S&P) and PwC Bermuda at the 2016 meeting of the reinsurance industry in Bermuda, market experts discussed the role of third-party reinsurance capital in the current, challenging reinsurance industry.

Alternative, or third-party reinsurance capital’s focus on the highly competitive property catastrophe space at a time of benign losses, has contributed to the supply/demand imbalance in the space.

Kean Driscoll, Chief Executive Officer (CEO) of Validus Re, the reinsurance arm of Validus Holdings, said; “We recognize that the supply-demand imbalance isn’t going to reach appropriate equilibrium unless we do something.”

ILS investment offers capital market investors an uncorrelated, diversified return that is relatively stable, albeit reduced in the current operating environment, when compared with other alternative assets.

The success and effectiveness of the ILS sector has seen the asset class gain broader acceptance, and at the same time looked to increase efficiency and yield by accessing risks more directly, and in new business lines and geographies.

President and Chief Executive Officer (CEO) at Bermudian reinsurer RenaissanceRe, Kevin O’Donnell, underlined that alternative reinsurance capital no longer applies purely to hedge funds, as the scope of the investor base has broadened and institutional investors such as pension funds are now large players in the space.

“Third-party capital is a permanent fixture in our business, but their appetites have changed and they will continue to change. We have seen capital try to get closer to original risk – we expected it to move horizontally and it’s gone vertically,” said O’Donnell.

The market headwinds aren’t just impacting reinsurers, as ILS funds’ heavy focus on the property catastrophe sector means they too are experiencing rate declines and high competition. In response, some in the space have looked to access risk more directly, essentially jumping the risk value chain to get closer to the primary source of risk, hopefully increasing efficiency and improving returns.

The ILS investor base has grown in maturity and sophistication as it’s further cemented its place in the reinsurance industry, and is “looking to establish a permanence,” said Driscoll.

“There’s a lot of money sitting out there that will push in. There’s definitely a lot of learning in the ILS space that needs to occur before it’s fully formed,” continued Driscoll.

At a reported $75.1 billion the alternative capital space is continuing to expand, but it has been said previously that in order for this kind of growth to persist evolution and innovation into new risks and regions is likely a must.

The ILS space appears to be finding its place in the global risk transfer world, and the evolving risk landscape has driven a trend among insurers and reinsurers to work with and embrace ILS solutions, supporting its role as a permanent fixture in the reinsurance industry.

The broader reinsurance market remains very challenging, but the panel was eager to discuss previous tough market cycles, noting that returns are low but still attractive when compared to many other industries.

“I think the death of the reinsurance market has been greatly exaggerated,” said Joseph Brandon, Executive Vice President of Alleghany Corp. Who also expressed pleasure “with the current rate stabilizing environment,” and explained to the audience that, “What we’ve gone through in the past few years doesn’t even compare.”

Other market participants have highlighted rate stabilization in recent times, with an expectation that this will persist into the new-year and the key January 1st renewal season.

Discipline is likely to remain an essential tool for reinsurers and also ILS players at the upcoming renewals, and most likely for as long as the market remains soft and pricing and terms and conditions are pressured. And with alternative capital seemingly a very permanent and growing part of the mix for insurers and reinsurers, innovative and new business models and strategies, and solutions that utilize a number of risk transfer tools will likely continue to be explored.

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