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Original Risk: A Society for Change Agents

Capital markets a ‘once in a career opportunity’: AIG’s Shah


The convergence of the capital markets with insurance and reinsurance, through the growing insurance-linked securities (ILS) market and the availability of efficient, lower-cost capital, provides a “once in a career opportunity,” according to AIG’s Samir Shah.

The opportunity facing insurers and reinsurers is seen as potentially industry changing, as has been evidenced by the structural change faced by the market in recent years. Samir Shah, Head of Insurance Capital Markets at AIG Inc., explained why this could be an opportunity not to be missed.

Speaking on a cedents panel at the 2015 Bermuda Reinsurance conference, hosted by PwC and Standard & Poor’s yesterday, Shah explained that as the value chain from risk to capital continues to break down, opportunities will emerge to reduce the cost of risk capital and ultimately to increase availability and affordability of insurance.

Shah said that he believes the last few years of disruption have been about much more than just “additional capital coming in,” saying that the result is a “fundamental difference” in the price, cost and efficiency of reinsurance.

The “capital that’s coming in provides opportunities to further diversify the risk, lowering the cost-of-capital through diversification,” he continued, “The capital markets is a once in a career opportunity.”

He explained that the ability of efficient capital flowing into the re/insurance market from institutional investors to reduce the cost-of-capital in both insurance and reinsurance markets, is an opportunity not to be missed.

By reducing the cost-of-capital in both insurance and reinsurance it should be possible to ultimately increase the availability of insurance products, Shah explained, which answers some of the issues faced in the industry, where both insurers and reinsurers are searching for new opportunities.

Another panel participant, James Slaughter, SVP of Global Reinsurance Strategy at insurance group Liberty Mutual, agreed, but felt that the benefit of third-party capital and ILS would be something that is increasingly felt over the longer term.

Slaughter explained that longer-term he feels that the capital markets entry into insurance and reinsurance will bring “opportunities to distribute risks more efficiently.”

He went on to discuss some of the drawbacks in ILS structures, particularly catastrophe bonds, which have led Liberty Mutual to pull-back from that market, largely due to overheads in cost and effort.

However the future trend Slaughter predicts, is one of more “direct distribution of risk from original customer to the capital,” as efficiency and cost-of-capital come to the fore and the market works through issues around overheads.

Bill O’Farrell, Chief Reinsurance Officer of ACE Ltd., also participating in the cedents panel, explained that “frictional costs” associated with catastrophe bonds remain an issue for ACE and have prevented it from issuing another cat bond in recent years.

Of course, part of the reason that large cedents like Liberty Mutual and ACE have pulled back from cat bonds lately is their ability to secure reinsurance capacity with lower frictional costs in the traditional and collateralised reinsurance markets, helped by the competitive nature of reinsurers.

Coupled with the centralisation of reinsurance buying, this has made some ILS structures, such as cat bonds, less attractive to these very large cedents. However that doesn’t apply to all, as AIG continues to issue cat bonds and leverage a variety of capital markets tools and structures.

Shah explained that issues such as increasing the efficiency of ILS, removing frictional cost and effort overhead, reducing the novelty premium paid for some structures and structural considerations such as surrounding collateral release, are all obstacles that will be overcome.

Shah also said that in order for the capital markets to increase its access to insurance risk, get further along the value chain and to access new lines of business, requires a “reliable rater of risk,” be that a rating agency, lead underwriter, risk modeller or another party who helps capital market investors to understand the exposures they want to assume.

Ultimately, Shah said, the evolution and ingress of the capital markets will result in a “collapsing of the value chain” with disintermediation affecting all sides of the insurance and reinsurance market and everyone competing with each other, including increasingly between brokers and markets.

Hence while the capital markets interest in risk offers a rare, perhaps once in a career, opportunity for insurance and reinsurance to redefine itself, it will not be without pain and difficulties for incumbents, as they come to terms with the need for efficiency, the breaking down of the value chain and disruption of the roles they have historically played.

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