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Alternative capital still largely focused on easier to understand risks: Newhouse


Alternative reinsurance capacity struggles to find a home outside of existing, well-defined product lines, according to Guy Carpenter’s Chairman Britt Newhouse, but this provides clear opportunities for growth for ILS specialists.

Alternative capital and ILS is a growing force in the global reinsurance sector. However, while it positively bolsters the sector’s capital base in some lines and regions, underserved regions of the globe would greatly benefit from its deployment into innovative, effective and new product lines.

“I’m not sure a whole lot of new has come out of the (alternative) capital, it’s almost exclusively focused on existing risk that’s more fungible, easy to understand, easy to model,” explained Newhouse while speaking on a panel at the 2015 Global Insurance Forum in New York.

He continued to explain that when trying to find ways to leverage the growing pool of new capital in the reinsurance space, it’s almost always on developed markets and existing products.

“The new capital almost says, I don’t want anything to do with microinsurance, with terrorism, with cyber and so they’re not underwriters, they’re not innovators, they’re trying to isolate and silo risk to invest in. So it hasn’t had a big impact,” Newhouse continued.

Despite alternative capital, via insurance-linked securities (ILS), catastrophe bonds, collateralized reinsurance linked investments, sidecars and so on, perhaps struggling on ‘new’ risks meaningfully, it is bringing new capital, a host of new sponsors, new risk transfer opportunities and structures to the sector, a plus in any market.

The level of impact that ILS and alternative capital has on the reinsurance market seems debated, depending on who you listen to. There is clear evidence of ILS specialist fund managers already expanding their remit, with forays into primary lines now becoming evident as well.

But the continued focus on well-modelled and more easily understood peak catastrophe risks is still a positive. For these are the lines of business and regions where capital efficiency is so vital and access to deeper pools of liquid risk capital are desirable to make the markets more efficient.

And, according to industry expert and Chief Executive Officer (CEO) of the newly combined XL Catlin, Mike McGavick, the presence of third-party reinsurance capital helps the traditional, existing players to innovate.

McGavick said; “The fact that the capital guys want to come to the safe places, that’s not a problem, because it expands the total capital base of the industry, if we use our skills to build the pilot lights for where to go next, that’s our job, not theirs.”

It’s a good point, and one that has been shared by various industry experts over recent months that have called for market participants to embrace and utilise the glut of reinsurance capacity, instead of viewing it as a threat.

It’s also the reason that partnerships between established ILS players and traditional insurance and reinsurance companies are expected to increase, as ILS can leverage the depth of underwriting and analytical knowledge at re/insurers, while re/insurers can tap into the deep pools of capital markets financing.

The persistent rise of alternative capital has seen an increase in the use and acceptance of ILS structures, such as catastrophe bonds, ILWs, collateralized reinsurance transactions, the use of derivatives or swaps, and the use of parametric triggers, a key aspect of which is its transparency of the risk exposure.

And as more of the industry accepts the reality that this capital isn’t going away, most likely even after the next very large loss event(s), the acceptance and adoption of ILS structured ventures will likely grow further.

With the use of technology and advanced analytics available in today’s market, coupled with the capacity and skills to make a real difference and fuel innovation, the industry is equipped to ensure the development of new products aimed at protecting the underserved people in the world.

So much noise has circulated around the threat and negative impact of alternative capital in the global re/insurance space, so it’s certainly promising to hear industry experts, like McGavick, stress the importance of its presence if the industry is going to tackle large-scale, unprecedented threats like cyber, terror and the rise of severe catastrophe events.

The challenge is to focus on deploying some of this alternative reinsurance capital into emerging risk classes, or underserved and developing markets, something Newhouse feels has not significantly happened so far.

Also read:

Opportunity to find supply/demand equilibrium in reinsurance.

Alternative capital’s interest in insurance “absolutely necessary”: McGavick.

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