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Original Risk: A Society for Change Agents

A new reinsurance business model is emerging: Shiv Kumar, GC Securities


A new reinsurance business model is emerging and alternative capital and insurance-linked securities (ILS) investors sit right at the heart of it, according to Shiv Kumar, President, GC Securities.

shiv-kumar-gc-securities-guy-carpenterKumar says he foresees a future, “in which capital and rated carriers come together in hybrid structures and longer-term partnerships.”

“Despite their various strengths, the current alternative capital structures have several important shortcomings. It is difficult to access risk on concurrent terms and conditions on a collateralized basis in the reinsurance market. Alternative capital does not benefit from the underwriting leverage that the rated reinsurers enjoy. Funded structures also trap collateral upon a partial loss, thereby taking capital out of circulation,” he explained.

Adding, “There is a need for structures that allow investors to continuously access a broad portfolio of risks over time through a licensed and rated entity while leveraging their capital, with a potential exit strategy.”

Some of the partnerships and joint-venture vehicles established between reinsurance firms and ILS investors in recent years achieve this and Kumar believes its just the tip of the iceberg, with many more to come.

“A new reinsurance business model is emerging in which capital and rated carriers come together in hybrid structures and longer-term partnerships. This is facilitating the expansion of alternative capital in both size and scope toward whole account quota shares or enterprise-level partnerships covering a broader set of business lines beyond property treaty, including medium-tail specialty lines,” he declared.

The interest of institutional investors in ILS and reinsurance as an asset class is unlikely to wane, he explained, as investors still value it as a source of diversifying, alternative returns.

As a result, “The flow of capital into the sector is unlikely to reverse in the near to medium term. This dynamic highlights the need for the reinsurance industry to innovate and pursue new strategies to utilize this source of capital efficiently.”

He noted that hybrid vehicles and structures have evolved over the years, as reinsurers grew or acquired their own capital platforms.

Now though, it’s time for reinsurance and ILS to come closer together, bringing risk and capital ever more into proximity, integrating the capital markets within a business model that traditional re/insurers understand, while investors still get the benefits of a typical ILS investment.

Kumar sees the potential for ILS to expand its remit much further in this way, accessing different types of risk and longer-tailed exposures.

“Strategic partnerships offer a flexible strategy to introduce a broader set of risks and longer-term arrangements. Carriers and investors may use the existing infrastructure to share in-force business or create new rated or unrated entities to underwrite new business. The agreement could provide reinsurers with potentially lower-cost capital and investors access to business that they would not otherwise be able to source or underwrite independently,” Kumar said.

“Along these lines, GC Securities recently advised Canopius AG on its strategic partnership with Samsung Fire & Marine Insurance. The arrangement allows Samsung to access the Lloyd’s market through the underwriting expertise of Canopius management. Furthermore, Canopius can leverage the substantial financial investment from Samsung and its franchise for its growth. In another example, GC Securities recently advised a company specializing in legacy runoff businesses on its structured partnership with ILS/pension fund capital,” he continued.

Kumar went on to explain the need for true alignment of interest.

There’s still a lot for insurers and reinsurers to learn on this subject of alignment, as ILS capital continues to get used as retrocession in many joint-ventures and sidecars etc, with alignment not always as clear cut as it really should be.

Kumar stresses the need for transparency and alignment, as issues that are key for the industry to overcome.

“The key to these arrangements is a strong alignment of interests between the parties. In our advisory role we encourage transparency between both sides to build trust for the long term. We design these capital structures to optimize efficiency for both the carrier and the investor. We access our firm’s reinsurance expertise, analytical capabilities, brokerage relationships and capital connections to ensure that the structure is responsive to the client’s needs, and creates meaningful value for both sides that can be sustained. Whether it is a whole account quota share or an enterprise-level arrangement, a multi-year commitment or an evergreen investment, our emphasis is on the design of a robust partnership for the parties,” Kumar said.

These partnerships do take investors away from their capital markets roots and the original premise of ILS being a securitized and liquid product, so won’t be for everyone. Other ways of delivering on the promise of the capital markets in reinsurance are also likely to emerge that offer a more familiar asset class to investors preferring that.

But these structured partnerships, as Kumar calls them, are a great way for large investors looking to access risk through preferred routes to lock in a partner and share in its performance.

For some investors that will be preferable, while others will opt for an independent management route. But the end result is the same, more alternative capital in reinsurance and more re/insurers reliant on it, we would suggest.

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