What do we mean by traditional, non-traditional or alternative reinsurance?

Readers of Artemis will regularly see us refer to things as traditional, non-traditional or perhaps alternative, but what do we mean by this?

When we refer to something as traditional, or non-traditional (sometimes alternative), we are typically referring to either capital, so the type of capital supporting a transaction, or a structure, as in how a transaction or reinsurance contract is put together.

We often write about 'traditional reinsurers'. A traditional reinsurance firm is one backed by equity capital, with shareholders and a traditional capital model. These reinsurers are often the established players many of which have been involved in the reinsurance market for years.

So we will write about non-traditional reinsurance capital. This is the portion of the global reinsurance market made up of the traditional reinsurance firms with their traditional reinsurance capital.

When we discuss non-traditional reinsurance capital, or alternative reinsurance capital, we are referring to capital which is being put to work in the reinsurance market which comes from non-traditional sources.

These non-traditional reinsurance capital sources are often institutional investors, such as pension funds, endowments, family offices, hedge funds and other private investors.

Non-traditional reinsurance capital is often, although not always, put to work in collateralized reinsurance transactions and insurance linked securities (ILS) such as catastrophe bonds.

Traditional and non-traditional reinsurance capital both have different costs associated with them.

It is generally accepted that non-traditional, or alternative, reinsurance capital is lower-cost and more efficient than traditional reinsurance capital. This is largely due to the lean nature of ILS funds and reinsurance capital managers, who have much lower expense ratios and leaner operations than a traditional, shareholder backed reinsurance company.

The lower cost of capital associated with non-traditional reinsurance capital means that it can sometimes undercut traditional players and is often able to take on risk for a lower return.

These lines are not defined however and they are becoming blurred, as many traditional reinsurance companies now have units which manage non-traditional reinsurance capital.

This is resulting in the development of a new type of reinsurer, with a hybrid capital model of both equity backed and capital from investors that the reinsurer manages. How this model plays out over the coming years is a key part of the coverage that Artemis provides and is a major structural change in the reinsurance market that is becoming increasingly important.

Keep up with the latest reinsurance news on Artemis.














Jardine Lloyd Thompson Capital Markets