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Alternative capital & ILS in early stages of casualty growth: Morgan Stanley


The presence of alternative capital in the global reinsurance market has, due to various factors, largely focused on property catastrophe business lines to date, but analysts’ predictions signal greater expansion of ILS into casualty risks ahead.

Discussing the impact alternative, or third-party capital is having on the reinsurance market environment, analysts at Morgan Stanley recently noted the potential for a shift towards greater investment into casualty lines.

“Alternative capital will continue to gain share in property cat reinsurance and is in the early stages of expanding into casualty reinsurance,” advised Morgan Stanley.

Owing to a lack of historical data, sparse technological capabilities and the typically longer duration of casualty risks, particularly when compared to property catastrophe exposures, the wealth of alternative capital in the reinsurance space has largely focused on existing, developed product lines.

However, the establishment of a casualty-focused reinsurance and insurance-linked securities (ILS) fund in recent months, coupled with product innovation and advances in casualty-specific modelling platforms, has seen certain industry analysts take note of growth in casualty lines, albeit at the early stages of development.

In fact, reinsurance broker Willis Re, a division of Willis Group Holdings recently launched PRIMO, a casualty reinsurance venture that provides cedents with protection against casualty events and could serve as an entry point for providers of alternative reinsurance capital.

And prior to this Credit Suisse’s Asset Management team (CSAM) and ILS Investment Management (ILSIM) launched a specialist ILS fund focused on property & casualty (P&C) run-off portfolios.

So while the expansion, development and access to casualty reinsurance lines is clearly someway behind property exposures, again due to factors noted earlier in this article, the creation of a casualty-focused ILS and reinsurance linked investment fund is a sign that the industry is beginning to realise the opportunities and potential of casualty exposures.

And only through innovation, risk-taking and a concerted effort by the wider reinsurance and ILS sector can the glut of third-party reinsurance capital find a home in casualty lines.

In December of last year Artemis discussed the views of Guy Carpenter’s GC Capital Ideas team, which cited the unpredictability, technological limitations and restricted understanding of casualty risks as key reasons the exposures remain for the most part, out of the reach of ILS.

While enhanced casualty exposure modelling and understanding capabilities continue to evolve, market analysts have also noted the willingness of investors and alternative capital providers to have greater access to casualty lines.

And as reinsurers continue to seek a greater share of casualty business within their portfolios, owing to the diversification it offers and in an effort to avoid the most competitive aspects of the property catastrophe reinsurance sector, the signs are certainly pointing towards growth into casualty exposures.

Also read:

Casualty ILS or cat bonds need to have a clear exit point: Parry.

Casualty reinsurance, advantageous but high entry barrier: Goldman Sachs.

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