Lloyd’s Nelson: Alternative capital can help insurance grow to $2tn by 2025

Lloyd’s chairman John Nelson had the chance to expand on his thoughts on alternative capital in reinsurance at the Monte Carlo reinsurance Rendezvous this morning when he spoke at PwC’s breakfast briefing. Nelson said that new forms of capital can help the commercial insurance market grow from $600bn to $2tn by 2025.

Nelson, who spoke last week in London and discussed the potential for systemic risk in reinsurance if alternative capital was not used responsibly and underwriting standards not maintained, today discussed the growth potential in insurance and reinsurance markets and was happy to include alternative capital and insurance-linked securities (ILS) as factors supporting an expanding market.

Nelson said that the majority of the growth he forecast would come from emerging economies, where penetration of commercial insurance is low. He said that the changing nature of risk and increasing demand from emerging economies for protection will provide a real opportunity for insurers and as a result reinsurers in terms of growth.

Nelson said that alternative capital was not just a ‘flash in the pan’ and could influence a fundamental shift in how risk is transferred and capitalised, which in turn could shape the future of the insurance and reinsurance industry. He said that there is a diverse market in alternative capital, some beneficial and some perhaps more concerning, but he concluded that alternative reinsurance capital provides real opportunity for the reinsurance sector as long as clients interests are put first.

Nelson commented; “This emerging shift is allowing a more sophisticated and extensive commoditisation of risk, which in turn is leading to a situation where both reinsurers and brokers may start to behave like managers of investment portfolios.”

Referring to his speech made last week Nelson said that the industry needs to focus on how best to put tis new capital to work. It needs to ensure that the use of alternative capital is sustainable and that the customer comes first with no reduction in underwriting diligence.

Nelson closed by saying; “Despite the current challenges, I remain very optimistic about the future of this industry, because the world needs more insurance and there is the capital that has confidence to invest in us.”

Arthur Wightman, partner at PwC, who hosted the event commented; “The risk transfer market has a history of great innovation – stimulating book-value building demand from new geographies, products and cedants is the solution. The current environment ought not to be about traditional versus alternative, it is about growing the pie overall while ensuring that the fundamental tenets of critical risk selection, profitable technical pricing and long term policyholder protection are all preserved.”

More reading:

There are so many reports and commentaries coming out on alternative reinsurance capital and ILS in the run up to and at the Monte Carlo Rendezvous event that we felt it worth highlighting some other reading on the topic, all from the last week or so, which you can find below (most recent first):

– Insurance-linked securities market calling for innovators: PwC

– Catastrophe bond market may hit $23 billion by end of 2016: GC Securities

– Alternative capital as significant to reinsurance as emergence of Bermuda: S&P

– Demand for alternative reinsurance instruments and ILS to continue: Fitch

– Alternative capital the biggest challenge for traditional reinsurers: Moody’s

– Lloyd’s Nelson warns on ‘systemic’ risk of alternative reinsurance capital

– Broker facilities an opportunity for third-party capital to expand reach?

– Opportunity for reinsurers to learn from ILS: Aon Benfield CEO

– Capital markets investors boost global reinsurer capital to $510 billion (including a useful list of links to many alternative reinsurance capital initiatives that we have covered previously)

– Strong capital inflows bring ILS & cat bond market to new high: Aon Benfield

– Alternative capital a disruptive force in reinsurance: Goldman Sachs