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Alternative capital a supplement to traditional sources of capacity: Marsh


The wealth of alternative capital currently sat in the global reinsurance space provides solutions that supplement existing, traditional coverage, according to Marsh’s U.S. Property Practice Leader, Duncan Ellis.

The presence of alternative, or third-party reinsurance capital in the sector has for some time now reached a mass that signals that it’s likely here to stay, as institutional investors and alike continue to seek the benefits of diversifying their portfolios with an uncorrelated asset class.

Furthermore, the general consensus from industry experts and analysts in recent times is that regardless of losses, the alternative capital providers will remain in the sector.

“This is an exciting time. We’re seeing this from hedge funds, sovereign wealth funds, and pension funds, just to name a few of the sources. It’s funny that many still call it alternative capital, but it’s now becoming quite normal,” said Marsh’s Ellis, noting that its apparent permanence in the market is more suited to the term, non-traditional sourced capital.

However it’s phrased, the fact is that this abundance of capital from new and emerging providers, large and small, isn’t going anywhere fast, and insurers and reinsurers would benefit from utilising its capabilities into innovative solutions.

Echoing the views of Guy Carpenter’s Britt Newhouse, Ellis notes that for the most part, the spate of non-traditional capital is still focused in the catastrophe peril space, on exposures like earthquake, flood and wind.

“But we are seeing this capital branch out into different areas that can also be modelled and somewhat quantified,” said Ellis.

While the expansion of non-traditional capital into casualty and less developed, emerging business lines is still in its early stages, Ellis explained how it compliments existing exposures.

“So what we’re seeing is that these capital solutions can be a good way to supplement existing coverage, especially around perils that have exhausted their traditional markets capacity,” advised Ellis.

This is evident in the choice and diversification insurers and reinsurers have had in recent months when renewing their reinsurance placements at the beginning of the year and the recent June/July renewal season.

Looking forward, Ellis stressed that insurers will likely increasingly have a choice to make regarding alternative capital; “Is it time (for insurers) to consider non-traditional or third party capital as collateralized reinsurance, insurance-linked securities (ILS) or consider multi-year single limit options, or risk improvement-sharing programmes.”

Clearly the wealth of capacity, from traditional and non-traditional sources would be wise deployed into emerging, large-scale global risks, including protecting the world’s most vulnerable people.

Limitations with historical data and modelling capabilities are rapidly improving, but the inherent challenges posed by such exposures results in difficulties with pricing, hence alternatives capital focus on existing product lines.

But as Ellis notes this isn’t necessarily a bad thing. While true that so long as the capital remains in the space it will continue to pressure rates across the sector, filtering down into primary lines, it does a solid job at supplementing existing, developed peril exposures.

Ellis concluded;There are a lot of options out there, and this market place is very pro-buyer at this moment in time, and absent of anything changing with the balance of the year I think it will continue.”

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