Swiss Re Insurance-Linked Fund Management

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Alternative capital helps reinsurance serve broader set of goals: Swiss Re


The utilisation of reinsurance protection is transitioning to serve a wider range of goals, and the integration of efficient, alternative reinsurance capital is helping the market achieve this, according to Swiss Re.

The continued evolution of the insurance and reinsurance industry has resulted in a more mature and sophisticated approach to buying reinsurance protection, where strategic, structured and customised solutions enable greater efficiency, a trend that is supported by the flow of alternative capital, says Swiss Re in its latest SIGMA report which was launched on the first day of the 2016 Monte Carlo Reinsurance Rendez-vous.

“Structured protection and risk transfer solutions are tailored to increase the efficiency of re/insurance programs by combining multiple risks and/or interdependent triggers. As part of an integrated enterprise risk management process, risk transfer is focused on the joint distribution of all risks. Another aspect is the integration of alternative capacity in order to provide large lines of catastrophe capacity,” says Swiss Re.

The reinsurer continues to explain that along with the growth of insurance-linked securities (ILS), regulatory reforms, consolidation of the industry, technological advances, and the globalization of risks are all drivers of market developments.

Throughout the report Swiss Re highlights ways to increase the efficiency of risk transfer, noting the importance of ILS capital in the risk transfer landscape.

“The supply of catastrophe reinsurance has changed significantly over recent years, with alternative capital (AC) gaining importance as a source of capital for rare but high-severity risk layers, in particular for US peak perils,” says Swiss Re.

The majority of reinsurers now work with alternative reinsurance capital and its features in order to improve efficiency, and also to expand the capabilities of reinsurance through new products and innovative features.

One such feature is a parametric trigger structure, something that is common in the ILS space, and that was also highlighted by Swiss Re as a solution that can increase the efficiency of risk transfer.

“Pay-outs are based on indices rather than actual losses. These structures are used to enhance insurability of difficult-to-insure risks, such as weather-related, commodity and non-damage business interruption risks,” explains Swiss Re.

The use of such a structure enables unique, or difficult risks to become more insurable, ultimately helping to narrow the protection gap as cover is made available to the world’s poorest and most vulnerable.

The risk landscape continues to evolve and if insurers and reinsurers are serious about protecting against an array of difficult, and expanding risks, it’s likely that the features and capacity of the ILS will be needed to support, supplement and innovate.

In recent years ILS capital has shown its maturity and willingness to assume a broad range of risks, and it’s expected that this trend will continue, ultimately helping reinsurance serve a broader set of goals.

Read all of Artemis’ Monte Carlo Rendez-vous coverage here.

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