Alternative reinsurance capital trend an opportunity for mutual insurers: Willis Re

There’s been a lot of coverage on the threat non-traditional reinsurance capacity from third-party investor backed sources such as insurance-linked securities, catastrophe bonds, collateralized reinsurance capacity and sidecars presents to traditional reinsurers. It’s refreshing today to read a press release from reinsurance broker Willis Re discussing an opportunity this trend presents to mutual insurers which could help them capitalise on the changing reinsurance market.

Willis Re believes that mutual insurers have found themselves in a position to capitalise on the changing traditional reinsurance marketplace. As distribution models change alongside inflows of third-party capital into the reinsurance space, traditional reinsurers have become concerned over both their existing portfolios and access to growth in an increasingly competitive market.

According to Willis Re, this puts mutual insurers in a great position to capitalise on this by strengthening their relationships with existing relationships with the traditional side of the market and build new relationships with traditional reinsurers too. Mutual insurers are ultimately owned by policyholders, rather than shareholders, meaning that certain types of alternative reinsurance and risk capital may be more difficult to access for them.

Robin Swindell, Executive Vice President of Willis Re, said; “Traditional reinsurers are very aware that while some larger commercial buyers are reducing their use of reinsurance in this phase of the reinsurance cycle, mutual buyers value long-term sustainable relationships throughout the entire cycle. This is the perfect time for mutuals to demonstrate that they are reinsurers’ preferred customers.”

This is an interesting side-effect of the influx of third-party capital into the reinsurance market. It could make gaining access to reinsurance capacity, and also the terms of accessing traditional reinsurance capacity, easier and potentially cheaper for insurers who might struggle to make as much use of the alternative reinsurance markets as their privately owned counterparts.

John Cavanagh, Chief Executive Officer of Willis Re, said; “Seismic changes occurring in the traditional reinsurance market are clearly favourable for mutual insurers. Willis Re has always been a strong advocate of the long-term business models characterised by mutual insurers, and will continue to provide analytical and transactional support to our clients in this important market.”

Some traditional reinsurers will certainly be trying to focus on which types of reinsurance buyers are most likely to require the rated capacity that they can provide. However it could be a dangerous game for traditional reinsurers to place too much reliance on customers like mutuals, as  some have looked to tap the catastrophe bond market for protection and we’re likely to see this happen more often.

We also know from our discussions with market participants that there are collateralized sources of reinsurance capacity which are actively seeking to become part of the reinsurer panels that mutual insurers take their renewals to. While this opportunity might present itself to mutual insurers in the short-term, it is perhaps one which is best capitalised on quickly, as this opportunity may not exist forever in a changing reinsurance market.

So clearly we see that Willis Re is correct that there may be an opportunity for mutuals to access traditional reinsurers and build strong relationships, while other insurers are increasingly utilising alternative reinsurance capital sources. However, if this trend continues, as we believe it will, and traditional reinsurers are increasingly forced to embrace the way the market is moving, then mutuals who place too much reliance on traditional players risk being left behind or not having access to the most attractive coverage opportunities. Mutual insurers, like any organisation looking for reinsurance protection, will be closely watching the alternative reinsurance capital trend and working out how it can best serve them.

Read our article on Willis Re’s recent reinsurance renewals report: Emerging model of ‘fast capital’ threatens traditional reinsurers.

Update: Robin Swindell, Executive Vice President of Willis Re, has kindly provided some thoughts on some of the issues we raised in this article:

“I agree that in the long-term there is a risk for mutual insurers which place too much reliance on any one type of capital provider, in the same way there is for stock companies. However, given the current excess of capital I don’t see this as being an issue for some time to come, if at all. There are two issues that are likely to define the fight for dominance in this segment.

“Firstly, in the nearer term the emphasis will very much be on the new players courting the mutual insurers if they want to expand into this attractive market segment. The ‘fast capital’ model and the philosophy behind it is not a natural fit with a mutual insurer’s long-term view of the world; this is something that will give traditional markets a significant edge over the new comers.

“Secondly, many mutual insurers are invaluable to their policy holders / owners, as they offer broad form coverages that are not available elsewhere. In the same way, traditional reinsurers that recognise this and provide coverage to match will be invaluable to the mutuals. Traditional reinsurers who offer a wide range of coverages (property risk, casualty, professional lines etc.) and are happy to discuss bespoke coverage currently have a significant advantage over non-traditional markets that have more commoditised offerings. However, it is it is anticipated that non-traditional markets will broaden their offering over time.”