Alternative capital’s interest in insurance “absolutely necessary”: McGavick

Discussion of alternative capital’s presence in the global insurance and reinsurance sector sparks varied industry opinions, but for XL Catlin CEO Mike McGavick it’s essential that the additional capacity feels at home in the space.

During a special address this week at the 2015 Global Insurance Forum in New York, McGavick stressed the importance of alternative, or third-party reinsurance capital nestling in the global re/insurance sector, hailing its presence as a main driver of the industry renaissance.

“The reality is that having that capital interested and comfortable in our sector will be absolutely necessary if we really do create breakthroughs in these other products and opportunities, whether technology or elsewhere,” said McGavick.

McGavick continued to explain that while the volume of capital, both traditional and alternative, currently outweighs demand in the space relative to the existing product set, “we have nowhere near the capital to solve the problems we should really be ambitious to solve.”

Alternative capital, in the forms of catastrophe bonds, insurance-linked securities, collateralised reinsurance, sidecars and so on, has been around for a fairly long time explained McGavick, but only in the last three-four years has it really begun to find critical mass.

And it’s around this time that industry players started to become concerned by it, “and saw it maybe as an existential threat to the traditional insurance and reinsurance model,” said McGavick.

But this wasn’t the view of McGavick and the then stand-alone company XL, amidst the realisation that this capital was here to stay and that it would likely be transformational for the sector.

McGavick noted that some industry players, himself included, took the approach that “you always want to be in an industry that is attractive to capital, the alternative is death.”

The issue now with the glut of alternative reinsurance capital in the space is that it’s highly focused on profitable business lines where sophisticated modelling and analytics exist. Alongside excess traditional capital and the resulting competition, this has brought on a distortion of some markets and a negative, challenging pricing environment.

“That is of course concentrating the sector on certain smaller subsets, and creating the kind of pricing war that is no fun for anyone, eventually even not for the client,” McGavick advised.

So while the increase in reinsurance capacity, both traditional and alternative does create opportunities to provide needed solutions and protection, until it’s actually put to work in emerging, innovative product sets it will likely continue to stress and pressure rates in the sector.

The XL Catlin CEO describes alternative capital as a “very influential force” and one that he certainly feels isn’t going away, and when one considers the amount of capital required to protect against emerging, large-scale risks such as emerging market disaster risks and cyber, it’s easy to see why McGavick feels its presence in re/insurance is “absolutely necessary.”

McGavick began his speech addressing the issue of the re/insurance industry remaining relevant, stating that declines in insured to economic loss totals are a sign that the industry isn’t doing its job properly. “We’re not keeping up,” he said.

According to McGavick the trends driving the re/insurance sectors lack of relevance include globalisation, analytics, alternative capital, consolidation of the broker community, and new regulation.

But the same drivers can be used to create opportunities and force an industry renaissance; something McGavick feels is not too far out of reach.

“That’s the great opportunity using that analytical insight to attack new solutions, to create new solutions and to harness that alternative and traditional capital then to provide the ultimate solution,” concluded McGavick.