The rise of alternative reinsurance capital has seen it transform from a disruptive market force to being used by the majority of global re/insurers in some form, but the more traditional, experienced players will still deal with the more complex, complicated risk layers, according to industry experts.
As the influx of third-party reinsurance capital started to really gain mass and impact global reinsurance market rates, most notably in property catastrophe business lines, the disruption left many in the industry wondering what was going to happen next.
Questions of whether the wealth of institutional investors seeking the returns of a diversified, uncorrelated asset class would remain after a significant loss, and what the flood of competition and resultant capacity meant for the reinsurance landscape going forward, have often circulated industry commentary.
Speaking at the recent reinsurance industry meeting in Monte Carlo, executives from the insurance and reinsurance sector, including Tom Bolt, Director of Performance Management at Lloyd’s and Dennis Sugrue, Director of Insurance Ratings at Standard & Poor’s (S&P), discussed the longevity and impact of alternative reinsurance capital as part of the S&P Monte Carlo panel.
The reality is that the majority of the alternative capital entering the space is from pension funds and institutions with large balance sheets and numerous investment avenues.
Reports suggest that the current wealth of alternative reinsurance capital in the global reinsurance space equals roughly $69 billion and, typically the third-party capital providers only invest about 1% of their assets in the re/insurance business, explains Tom bolt.
“You come up with a number that’s say $600 billion, so I don’t think you should dismiss it and say it’s going away. Will it eat our lunch and we all don’t have any business in the future because we’re all going to do ILS things? I don’t think that’s in that either,” continued Bolt.
Bolt’s admission that the wealth of capacity from third-party investors will persist echoes that of other industry noise in recent times, as the market shows signs of accepting its presence and permanence and increasingly looks for way to utilise its benefits.
However, as with traditional insurers and reinsurers Bolt does expect some of the new, alternative capital providers to run after a loss event, suggesting that this is nothing new and is to be expected.
“But I do think that like a traditional insurer, after you have a big loss some traditional insurers start running, and I’m sure after we have a big loss some of the ILS guys will start running. But I also think the other guys will come in because of payback, and the higher ratings at the time,” said Bolt.
Combine the facts that the majority of institutional investors participating in the space only allocate around 1% of their AuM to re/insurance business, and that as a system reinsurance is fairly easy to enter, Bolt feels “it’s hard to see a reason why they aren’t around for some time to come.”
As more alternative capital is accepted and ultimately deployed by traditional insurers and reinsurers to supplement or bolster their existing reinsurance programmes, or to cover new, emerging risks, a greater supply/demand balance will be achieved in the sector.
A key issue with the persistent entry of alternative reinsurance capital is that it’s focused on easy to model, well-understood, largely commoditized layers and risks, increasing competition in business lines already flooded with traditional market participants.
And while it might serve to release some pressure on rates in the global insurance and reinsurance sector by deploying some of the excess capacity into less competitive, or underserved business lines and geographies, it’s focus on commoditized lines could mean the more complicated risks fall to the traditional players, explains Bolt.
“So risks that are complex and complicated and that you have to explain are still going to probably fall to the hands of folks at Arch and similar to deal with those,” explains Bolt.
It’s an interesting point, as many of the alternative reinsurance capital providers aren’t experts on risk or re/insurance or insurance-linked securities (ILS) products, but more providers of capital seeking to make a profit and diversify their overall investment portfolio.
A point further highlighted by the fact that many participants in the collateralized reinsurance, or third-party investor landscape, don’t deal directly with the insurer or client themselves, but rather through a fronting carrier or reinsurer, the party that really understands the risk and business.
The majority of reinsurers that S&P rates now participate in alternative reinsurance capital in one way or another, explains Bolt, and as modelling capabilities advance in emerging business lines and property cat rates decline further it’s expected that it will increasingly enter casualty and other primary lines too.
The growth and evolution of alternative reinsurance capital has seen it mature and gain a greater foothold in the global reinsurance sector, and now innovation and determination is required from the re/insurance world to utilise its capacity for risks outside of peak peril hotspots, like parts of the U.S., and into emerging, vulnerable regions like parts of Asia.
“We talked about using alternative capacity to provide some risk protection to emerging markets, to stabilise ratings or economics in the wake of a catastrophe, so I think more this market is embracing it and trying to harness the power of it rather than seeing it as a disruption.”
“I think in the beginning it was maybe a bit more disruptive but now we see virtually every reinsurer that we rate at some participation in it,” said Dennis Sugrue.