Perhaps giving us another glimpse of the coming future state of insurance and reinsurance markets, Marsh & McLennan Co’s. Chief Executive officer Dan Glaser said that the alternative capital backed Alternus facility is “willing to write virtually every property account of Marsh.”
Glaser puts this down to the work undertaken to shape the property insurance business that Alternus sees into something more portfolio-like, in order to help the backers Allianz and ILS specialist investment manager Nephila Capital access the risk in the most efficient manner.
Alternus, which launched in April, is a commercial property insurance facility which is underwritten by the Schinnerer Group and brokered by Marsh, while capacity comes from insurance giant Allianz Global Corporate & Specialty (AGCS) paper and alternative capital from Nephila Capital, the world’s largest catastrophe and weather focused reinsurance linked investment manager.
At the moment the Alternus facility is offered to offered to U.S. companies looking to insure risks associated with their global property portfolios and can cover up to 10% of an insured’s entire property insurance program with limits per program of up to $200 million available.
But comments made by Glaser suggest that Alternus could become significantly larger, if the broker and the backers of the facility saw fit to really mobilise the capital efficiencies that this approach, of a large rated carrier backed by the most efficient catastrophe capacity, can bring to the property insurance market.
Glaser explained that Alternus has, by leveraging the capacity of Nephila, helped Allianz to better satisfy its appetite for U.S. property risks without stressing its catastrophe exposures.
“The way to look at it is that there is a major insurance company, Allianz, that had always wanted to participate in a more significant way in United States property, but they felt they had enough cat, and so that was an inhibitor of greater levels of participation,” Glaser explained.
“Marsh very creatively thought through, well, how can we marry up their appetite with alternative capital, and sought alternative capital using a high degree of Marsh data and Marsh analytics to create more of a portfolio look to the property portfolio that Marsh had,” he continued.
“That was a combination between Allianz and Nephila,” Glaser said, as the capacity provided by Nephila and its ability to take on peak catastrophe exposures makes an ideal way to leverage the scale of Allianz, while giving the insurer what it wants (access to U.S. property risk without the catastrophe exposure), while Nephila gains access to the catastrophe linked returns it seeks, and Marsh benefits from a unique product offering for clients.
This approach, of marrying a re/insurance firm of significant scale (Allianz), with efficient capital market-backed capacity (funds under management at Nephila) and significant distribution reach (Marsh has among the largest U.S. property programs), could be a glimpse at a future model for this type of underwriting.
Where an insurance risk contains catastrophe exposures that the traditional player does not want, an ILS manager like Nephila has the ability to absorb those risks as long as they are in a portfolio-like form that means they can effectively reinsure away the cat risk.
It means Allianz’s appetite for U.S. property risk can now be much, much larger than it could manage alone, or by leveraging traditional reinsurance that would likely be more expensive than the alternative capital when it is brought much closer to the front of the value-chain.
“Which at the end-result means that they’re willing to write virtually every property account of Marsh and they’re willing to write that at a guaranteed discount to the client of 7.5% off of any other markets pricing for the balance of the placement,” Glaser commented during the MMC earnings call.
Writing 10% of each property program funnelled into the Alternus facility is a pretty big deal, in terms of the access to risk this can provide to Nephila and the benefits that Allianz gets by having the capital markets take away the catastrophe exposures. But the fact that this extends to virtually every Marsh property account is huge, as it demonstrates the potential for scale.
Up that percentage a little, in order to really begin to leverage the efficiencies of scale that could also come with this business model and the benefits to participants and also the insurance buyers could be huge.
“It’s clearly a win for the client, it’s a win for the market because certainly bringing a market like Allianz to the forefront with alternative capital backing is a big positive, and it’s another example of Marsh innovation,” Glaser said.
The uptake for Alternus so far seems positive as well, as President of Marsh John Doyle explained.
“It’s still relatively early but the take-up rate so far has been positive. The feedback we’ve gotten from our clients has been positive as well.
“It’s a more efficient solution for our large property clients. So we think it’s a great way where Marsh can bring better value to our clients than we had before,” Doyle commented.
Brokers as marshalls of efficient risk capital? We’ve been saying that is one aspect of the market’s future for many years now.
It’s widely understood across the industry that as the capital markets influence on re/insurance grows the lines between brokers and underwriters will become increasingly blurred, and the winners here will be those that can most efficiently and effectively match a risk with the most appropriate source of capital to hold it.
With Alternus that is exactly what Marsh is doing, enabling Allianz and Nephila to take the risks they can most efficiently hold, which likely boosts the margins that can be extracted from this business, as it’s a more efficient value-chain, while cost benefits flow through more directly to clients as well.
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