Alternative capital and re/insurers’ can be best friends: Mike McGavick

As the re/insurance industry looks for ways to navigate a testing market, innovation into emerging, underinsured risks can be a key avenue for growth, but to cover the exposures really threatening the industry alternative reinsurance capital is essential, says Mike McGavick.

Addressing an audience at the PwC hosted breakfast briefing event during the 2015 Monte Carlo Rendez-vous, XL Catlin Chief Executive Officer (CEO), Mike McGavick, reinforced views on the influx and permanence of third-party reinsurance capital and the opportunity this presents to the global re/insurance sector.

A couple of years ago, explained McGavick, the market started to realize that the presence of alternative reinsurance capital had transformed from an interesting element to an extremely important market force.

As the providers of and managers of this third-party capital combined with the ever-present flow of traditional reinsurance capacity, a supply/demand imbalance took shape in the global reinsurance sector, pressuring pricing and seeing many players search elsewhere for more profitable and less competitive business lines, or embark on merger and acquisition (M&A) activity.

When the volume of this new reinsurance capital really started to gain critical mass McGavick highlighted that, and perhaps rightly so, there was a fair amount of trepidation about its impacts and exactly what might happen next.

And despite its persistent presence in the sector continuing to add to stress on rates and exacerbate a challenging operating environment for property catastrophe focused firms and increasingly other business lines also, like casualty, McGavick argues that “this is all good.”

The XL Catlin CEO isn’t referring to the numerous challenges in part driven by the entry of institutional investors and their capital, but instead noting the vast challenges and opportunities emerging, underserved and underinsured global risks provide the risk transfer landscape.

“I would always rather be in an industry that is attracting capital rather than losing its attractiveness to capital. The question is how do we apply that, does it stay and apply to a few well-known and understood business lines and rob them of all profit, or do we find ways to apply that capital to the overwhelming challenges,” said McGavick.

To date the flood of third-party reinsurance and ILS capital has largely focused on easier to model, well understood risks, a reason for the heightened competition and cheaper reinsurance coverage for many property catastrophe lines, a notion discussed here on Artemis previously.

The challenge then, advises McGavick, and what will really make the traditional reinsurance and primary insurance players start to appreciate the expanding presence of ILS and third-party capital in the sector, is to find ways of matching the excess capital with emerging, underinsured exposures around the globe, which are plentiful.

“With alternative capital we can see how they can be brought together, the reality is if we think about the level of underinsurance, while we may feel there is too much capital in the industry right now, given the pricing effect that we’re having. The reality is there isn’t enough capital to really solve the problems at hand,” stressed McGavick.

The very real and growing threat of cyber attacks, terrorism events, and numerous regions of the planet where insurance and reinsurance penetration levels are so low that major economic and social set-backs occur each time disaster strikes, are the kind of exposures and ensuing opportunities McGavick is referring to.

Furthermore, it’s not just the emerging risks and areas of the world where underinsurance is apparent, highlighted by the fact that when hurricane Sandy hit the most insured square mile on the planet, the volume of insured losses made up just 50% of the overall loss, “a stunningly low number for the most insured square mile on the planet,” said McGavick.

So the opportunities for the insurance, reinsurance, insurance-linked securities (ILS) participants and wider risk transfer world aren’t restricted to just emerging markets and risks, they are everywhere, says McGavick.

“This call to make a difference, whether it’s in emerging markets, like cyber, or whether it’s an existing risk that we still haven’t managed to get our arms around like flood, is an unbelievable opportunity.”

“We are going to have to bend those underwriting lines, that data we have, to the challenge of underinsurance and then the alternative capital will be the best friend that we ever have,” said McGavick.