The influence of alternative forms of reinsurance capital are beginning to be felt much more broadly across both the insurance and reinsurance market, with one area of note being the market for power industry property insurance risks.
According to insurance and reinsurance broker Willis Group’s latest report on the Construction, Property and Casualty international insurance market, the insurance market for power industry property risks is feeling the influence of the growth of the alternative reinsurance capital market.
In the power and energy sector insurance of property risks often involves either large, single risks, or is facilities based. These power and energy risks and facilities are seeking physical damage protection, often classed as either elemental (weather related), non-elemental, or a combination of the two.
Capacity for power risks has been on the rise thanks to additional capacity from known players like Pioneer and Endurance, the well-capitalised traditional reinsurance and insurance sector and it has also been boosted by the influx of alternative reinsurance capital, said Willis’ report.
However, alternative capital may find entering the power property risks space more difficult than other sectors, as the underwriting skills required to write this kind of business are not widely understood. There is a limited number of underwriters with the appetite and technical expertise required to write this kind of business, but some alternative capital may find it can piggy back on other underwriters to help to boost line sizes and access this space.
As a result of the increased capacity targeting the power property risks space pricing has been squeezed. The rate environment for these risks has been improving and generally it is possible to access more capacity and at more favourable terms than previously.
Another side effect of the influence of alternative reinsurance capital on the power sector, according to Willis, is that underwriters are finding it harder to force through increases to deductibles where there are concerns over loss trends, risk management practices or natural catastrophe exposures.
With competitively priced alternative capacity seeking new opportunities it is no longer a simple task to push through deductible or excess increases and discussions at renewals now involve flexibility, terms and improved conditions, rather than the opposite.
On discussing this trend with ILS market participants it seems there are a number who would be willing to put some of their third-party sourced capacity to work in sectors like the power and energy property risks space. Some are also already doing so by working with traditional players. Others are using capital to write business for power and energy on a parametric or industry loss basis.
One ILS player told us that if a traditional re/insurance player, with the underwriting experience and engineering expertise necessary, were to establish a sidecar dedicated to these types of risks, it could find significant appetite for the established ILS managers and funds who could partner with them and participate in the sidecar themselves, thus boosting the traditional players line sizes. Such a facility targeting this space might also find interest from direct third-party reinsurance capital investors.
These risks, particularly on the elemental or natural catastrophe exposed side, are of real interest to some of the more sophisticated players in the ILS space. We should expect an increasing amount of influence to be exerted on sectors like this, particularly as the ILS market looks more broadly at new insurance and reinsurance opportunities.