Alternative capital an opportunity for growth into new risks: Lloyd’s CEO Beale

The CEO of the Lloyd’s of London insurance and reinsurance market, Inga Beale, said recently that the alternative capital which has entered the market should be used as an opportunity to grow into uninsured and underinsured risks.

Speaking alongside other senior insurance and reinsurance industry executives at the recent Insurance Leadership Forum held by the Council of Insurance Agents and Brokers in Colorado Springs, Beale said that the new capital entering the reinsurance market is not a temporary phenomenon and that the industry needs to leverage it for their own growth.

As reported by Business Insurance here, executives discussed both the influx of new capital from third-party investor sources into insurance-linked securities (ILS) and collateralized reinsurance, as well as the need to look for growth in uninsured or underinsured classes of risk.

The two topics clearly fit together very nicely, as traditional reinsurance players now have an opportunity to leverage the efficiency inherent in alternative capital to put it to work in growing their businesses into new and emerging risks classes. Reinsurers can do this by growing their line sizes using third-party capital, allowing them to expand their remit or by using third-party funds to target new and underinsured risks or regions, perhaps utilising parametric covers rather than indemnity as they seek to stimulate new market development.

Targeting the provision of reinsurance cover to uninsured and underinsured risks, along with more efficient placement mechanisms, can help the insurance and reinsurance market to prosper, despite the softening market conditions, the executives said.

Beale said that the new capital entering the reinsurance market can often be satisfied with lower returns than those available in the insurance market currently, suggesting that the lower-cost of ILS capital can be put to work for the insurance and reinsurance industries benefit. “There’s a lot of underinsurance in the world and we will need this capital,” Beale commented.

At the same time this capital has entered the space at a time when risk model development and use has created a more stable underwriting environment, Beale continued. This has removed some of the volatility of the insurance and reinsurance cycle, which would again suggest that Beale believes that re/insurers need to look to growing the market rather than simply attempting to compete on price and terms.

Peter Hancock, president and CEO of AIG, said that he did not think large swings were as likely in the future as in past re/insurance market cycles. “The traditional hard and soft market where all lines are correlated is being replaced by line-by-line cyclicality,” Hancock said.

That is interesting, as with the reinsurance market cycle expected to be flatter due to the entry of alternative capital and expected influx of additional capital after any loss events. That means that lines of business where alternative capital is not as prevalent may see the largest swings in future and we could move away from a market wide cycle, to seeing more volatility in rates and pricing on a line by line basis.

Another interesting comment was made by David Long, chairman and CEO of Liberty Mutual, who said that in order for the insurance and reinsurance industry to see a meaningful depletion of capital an economic correction would be required.

This is not what the sector wants to hear, as there is an expectation that a major catastrophe loss would make some capital exit the space, allowing rates to be hiked. It may not be so clear-cut as excess capital is not simply a factor of reinsurance, according to the executives.

Long said that the economy in general is over-capitalised. This means that we will need to see a reduction of this excess economic capital before we will see any reduction of excess capital across the insurance and reinsurance industry.

So while excess capital is likely to stick around and more capital continues to wait on the sidelines, the message to insurers and reinsurers is to make use of this glut of capital, both traditional and alternative, and find ways to leverage it for growth.