Pressures likely to lead the reinsurance industry to adjust its capital structure

According to an article in the Royal Gazette Bermuda, the reinsurance industry is likely to see an increasing trend towards external capital leading their underwriting efforts as the traditional reinsurance model becomes less common. The event, PwC/S&P Bermuda (Re)insurance 2011, saw experts discuss the future for the reinsurance sector on the island and a very interesting conversation about how the capital structure of reinsurers was likely to change.

Multiple pressures on reinsurers from their investors, ratings agencies and regulators is likely to lead the industry to adjust its capital structure, says the article. In our experience this is already happening as more reinsurers become more like convergence outfits, backed by capital market funding.

One of the most interesting comments came from Mark Byrne, the Chairman of Haverford (Bermuda) Ltd, who offered that “The traditional model is broken”. He made a very good point that what is really valuable in the industry is underwriting talent and he expected more reinsurers to move towards a model where they operate with more flexible sources of capital. Many expect the next generation of reinsurance specialists to be much smaller operations, running a lean ship with a talented underwriting team capable of building a large book of business swiftly through their contacts. Capital is less likely to be invested in the reinsurer itself and more likely to be invested in the risks that they underwrite (something that will be very attractive to investors). We understand that there are a number of vehicles readying for launch that will demonstrate this lean, flexibly financed by external investors approach, both in Bermuda and other domiciles.

The Royal Gazette hits this ‘new model reinsurer’ nail firmly on the head with this sentence:

“A new model, with reinsurance companies leveraging their relationships with clients and underwriting talent, and other entities providing the pools of capital and shouldering the risk of losses, could become more commonplace.”

They couldn’t be more accurate with that statement, that is exactly the model that is emerging. This could lead to a talent squeeze though as underwriters who can bring business with them become more and more valuable to these lean reinsurer startups.