Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Alternative reinsurance capital to persist, despite being untested


The growing pool of alternative reinsurance capacity continues to enter the global reinsurance market, becoming an increasingly integral part of the sector’s landscape, but will third-party investors and their capital remain after the next large loss event?

“We believe the majority of it (alternative reinsurance capacity) is here to stay. Like every market there are sources of capital that come in for the momentary opportunity and then exit when a different opportunity emerges.

“But we believe a lot of the money coming in here is permanent money because that uncorrelated risk is real and it has been demonstrated to be a positive feature in their overall portfolio management,” advised Guy Carpenter Vice Chairman, David Priebe.

Generally, Priebe’s view on the longevity of alternative capital appears to be one adopted by the majority of reinsurance experts, executives and analysts in recent times. But the reality is that since the influx of alternative capital really started to gain mass, on top of the existing and expanding traditional sources of capacity, the industry hasn’t had to deal with a significant loss event.

Underlined by the fact that Florida hasn’t experienced a major hurricane for nine years now, the longest period sine 1851.

Reinsurer Aon Benfield’s Americas subsidiary, Chief Executive Officer (CEO) and Chairman of Aon Securities Inc., Byron Erhart shares Priebe’s view on alternative capital, suggesting that its evolution has changed reinsurers’ outlook on its permanence.

“I think there was a lot discussions two years ago about this point. At that point, too, a number of traditional reinsurers would have said this alternative capital is run by investors who are naïve. I think now there’s a realisation that these are professional investors, not just the managers of funds themselves, but the investors who are giving them funds to manage,” said Erhart.

Many traditional reinsurers have been in the market long enough to understand how to react after a catastrophe event, and insurance and reinsurance market participants can take some comfort post-event that traditional players have previously responded well.

After all, “it’s a tried and tested product that has worked over centuries,” explained Third Point Re Chairman and CEO, John Berger.

However, many still feel that this isn’t yet the case with the glut of alternative reinsurance capital entering the space from institutional investors and alike that are benefiting from the diversification and low-correlated returns associated with reinsurance, insurance-linked securities (ILS), catastrophe bonds, sidecars and so on.

Berger echoed this point; “I think it’s a valid concern and I think that’s why the cat model hasn’t made even bigger inroads. Companies are still wary of that. The cat fund model hasn’t been tested. We haven’t had a big loss.”

And while Berger, like other experts and analysts in the sector, can’t be certain on the permanence of pension funds, sovereign wealth funds and similar institutional investors’ endurance post-event, he would “bet on it sticking around.”

Furthermore, notes Berger, “it’s quite likely after a big event that not only would they not disappear, but that they could come in in a bigger way. It’s not like they’ve got 30% of their [assets under management] exposed to cat; they have half a percent. Maybe that half a percent goes to .75 or one percent. So I would bet on it sticking around.”

The general theme from the industry experts discussion, which was part of a roundtable conducted by ratings agency A.M. Best in its latest monthly Best’s Review publication, points to a belief that the majority of alternative capital providers will stay after the next big loss event.

Again highlighted by President of Swiss Re’s U.S. P&C unit, Bill Donnell, who said that while it remains to be tested, “Alternative capital is a legitimate asset class. It’s not going away.”

But despite the optimistic viewpoint of the roundtable participants, the reality of the situation was highlighted by General Re Chairman and CEO, Tad Montross, who said; “The honest answer is that nobody knows how these investors will react after a large loss or what their appetite will be when interest rates go up. We’ll just have to wait and see.”

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