The flow of alternative capital into the reinsurance market in the last five years is a seismic change perhaps greater than any change seen at any time in the reinsurance business, according to James Kent, President of reinsurance broker Willis Re North America.
Kent was interviewed by A.M. Best TV at the recent 2014 Meeting of Reinsurance Officials, held in Miami last week. He discussed the magnitude of the change being stimulated in the reinsurance market, thanks to the entry of alternative capital and insurance-linked securities (ILS) and argued that reinsurers now realise the capital has some permanence to it.
Kent began; “We are seeing a fairly seismic change in our industry. The changes that we’ve seen in the last three to five years are arguably greater than we’ve seen at any other time in the history of the business.”
Kent explained that the new capital is being attracted to reinsurance and views it as a dedicated asset class. Investors enjoy the ability of an allocation reinsurance and ILS to diversify their other investment classes such as equity, gold and energy. The result of this interest from capital market investors is; “We’re seeing a surplus of capacity driving down the reinsurance terms and conditions that we are seeing in the business at the moment.”
Kent notes that the capital is not actually that new, with reinsurance and ILS funds having existed for now 15 years or so, but it is the influx over the last five years that has been particularly impactful on the traditional reinsurance market, with 23% compound growth witnessed for alternative capital over the last ten years.
The focus for this alternative capital has been solely on property catastrophe reinsurance up until the last few years, but now an increasing trend for capital to enter other lines is being seen. One growing trend Kent identified is that of hedge funds partnering with rated companies to underwrite longer-tailed business such as casualty, with a more aggressive investment strategy to support the underwriting side of the business and deliver outsized returns to investors.
Non-traditional capital is leading to a broadening of the range of property catastrophe reinsurance products that are available to Willis Re’s clients, Kent said. Also benefiting buyers Kent noted the decline in pricing, saying that as capital has flowed into the market demand has not increased at the same rate, resulting in price softening.
However the capital does seem to be regarded as permanent, Kent said; “Most of the traditional reinsurers recognize that the capital has a permanency about it.”
Traditional reinsurers are aware of this and thus increasingly embracing alternative capital; “What is for sure is that reinsurance is seen as this dedicated asset class, and it’s something that you can’t ignore as the capital is here right now. The reinsurers aren’t ignoring this and as a consequence we are seeing with greater frequency the established reinsurer and this traditional capital coming together.”
Kent said that he feels the model which sees reinsurers partnered with alternative capital investors is his preferred model for ILS, as the ILS specialists do not have the distribution of a major reinsurer. However, as we’ve seen the ILS specialists are successfully building large businesses, just look at the top five or so, with origination capabilities increasingly being driven internally.
Also, it should be noted that in an innovative and lean market environment the brokers, such as Willis Re, should really be driving business to the most suitable source of capital for their clients, in which case brokers should control the distribution. Shouldn’t they?
Kent discusses relationships at some length, explaining that he feels that relationships are still key in reinsurance. That is undeniable, but will it always be the case? ILS players are building strong relationships with their clients, you can tell that from the increasing number of new catastrophe bond sponsors coming to market, as well as ILS players increasing their share of major reinsurance treaties. As we said the other day, it is the demonstration of staying power from ILS that will engender stronger relationships.
The relationship question may well be the next focus for disruption in reinsurance and that may also mean that the broker relationship is disrupted to a degree as well. This is an area and topic Artemis predicts we’re going to see change in, with innovation and technology developments also set to have a major impact on how the reinsurance market relationships are formed, grow and persist.
The interview with Kent is well worth watching in full and the video from A.M. Best is available below.