The use of the capital markets and insurance-linked securities (ILS) in reinsurance is “absolutely necessary” to increase the efficiency of insurance products and capital, according to the CEO of reinsurer Peak Re.
We spoke with Peak Re CEO Franz Josef Hahn in Monte Carlo to find out about the companies use of alternative capital and his vision for how it can be integrated into a reinsurer’s business model.
Hahn began by explaining that the companies collateralised reinsurance sidecar vehicle, Lion Rock Re, is just the first step in embracing the capital markets for Peak Re.
“The sidecar is working for this year, as a quota share to our cat business and we will soon come out with our roadshow for the next one. I think we want to utilise the sidecar for the phase we are in, as a quota share, as we have done with Lion Rock 1.
“There will be a Lion Rock 2, possibly a Lion Rock 3 and at one stage we will have our own arrangement into a catastrophe bond that we collateralise and syndicate a part of our total portfolio on a layer program into the capital markets,” he explained.
Hahn said that the insurance and reinsurance market’s need efficiency and that there is too much cost that is wasted in the system.
The capital market can help in making this more efficient, ultimately to the benefit of the insurance buyer.
Hahn stated, “My whole philosophy on the capital markets being part of reinsurance is, it’s absolutely necessary. The insurance and reinsurance industry unfortunately are highly inefficient. The kind of costs which are involved, not just the expenses.
He said that you wouldn’t see this in other sectors of the financial market, mentioning banking as an area that has embraced capital markets technology much more quickly than insurance.
Explaining some of Peak Re’s initiatives working with small insurance programs in emerging markets, where the company can use its risk expertise and capacity to back efforts to close real protection gaps, Hahn said this is an area for the capital markets to support expansion of risk protection.
“I think it’s a natural way to overcome this inefficiency, by linking the private buyer as quickly and highly efficiently into the capital markets,” Hahn said.
Adding, “The international reinsurance industry has to play a role here to decide, I’m not talking only about Peak Re here, but we have to play a role to enable the buyer of an insurance product to get the most efficient price and to link him or her immediately into the capital market.”
He continued to say that it “makes much more sense” to link insurance risk to the capital markets.
“We need reinsurers because a good reinsurer has one thing other people don’t have and that’s a fantastic underwriting operation. This system of underwriting, measurement and modelling of risk, nobody else is doing that.
“The reinsurer in particular has to be the risk manager, they need to assess the risk adequately and put it in relation to capital.
“Reinsurers can utilise this and combine the risk appetite from a buyer to the capital market and I think that should be the future,” he commented.
Also saying, “But we are only at the beginning of it, not just Peak Re but the entire reinsurance market, in syndicating the risk adequately into the capital market.”
He explained that “technology plays a very crucial role looking into the future,” for Peak Re and the entire reinsurance marketplace.
Hahn further explained that automation and new technologies such as machine learning will help Peak Re to ensure what it does is fool proof and much faster, with human intervention used for more intelligent parts of the risk transfer process.
“I think that’s a huge opportunity which we have and by translating the needs for an insurance cover into solutions which are coming from the capital market, by the right underwriting means provided by reinsurers.
“That’s the vision, how I always thought it should be,” Hahn told us.