Rick Pagnani, Chief Executive Officer (CEO) of Everest Re’s Mt. Logan Re collateralised reinsurance sidecar, has highlighted the “competitive necessity” of utilising the capital markets for re/insurers to optimise their capital structure, in light of continued expansion of the convergence space.
True convergence between the traditional insurance and reinsurance industry and the capital markets is set to continue. Potentially increasing the demand for insurance-linked securities (ILS) solutions and expanding the remit of the willing an able flow of capital markets investor-backed capacity.
Addressing an audience as part of the ILS panel at the 2016 meeting of the reinsurance and ILS industry in Bermuda in November, a panel that was sponsored by Standard & Poor’s (S&P) and PwC Bermuda, Pagnani and other panelists underlined the symbiotic relationship between the traditional and alternative reinsurance market.
It’s been noted by a number of industry experts and analysts in recent times, and more so since the wealth of alternative reinsurance capital reached a meaningful and influential size, that it’s increasingly difficult to tell apart traditional and alternative reinsurance business models.
The majority of insurers and reinsurers now work with the ILS space in some form, and reinsurance broker Guy Carpenter recently explained that 25% of re/insurers expect to utilise the capital markets more in 2017, suggesting the lines between traditional and alternative players and capital will continue to grey.
For reinsurers, explains Pagnani, having underwriting expertise along with the ability to access the capital markets to be able to create and package a cost-effective solution isn’t a competitive advantage, but more a “competitive necessity.”
The capital markets can provide reinsurers with the ability to optimise their capital structure, which should benefit both the company and its clients by facilitating the use of diversifying and efficient capacity to develop effective and affordable solutions, which ultimately supports their balance sheet.
It’s seems the majority of reinsurers have now realised this “competitive necessity,” as an increasing need for efficiency and a fight to remain relevant in the challenging, softening landscape, has driven a need for re/insurers to embrace a range of risk transfer tools.
A necessity to utilise the capital markets suggests that reinsurers would be wise to embrace the ILS sector and incorporate it into their capital structure to increase efficiency and relevance, or perhaps risk being left behind in an industry that is evolving at a rapid pace.
Dirk Lohman, Chairman and Managing Partner at Secquaero Advisors, also said that it’s “definitely efficient to have that (capital markets) as a strategic element of your overall capital structure,” and, overall, ILS panel speakers expressed a belief that the symbiotic relationship between the traditional and alternative space will continue, with little separation expected in the future.
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