Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Capital to move down the value chain in search of purest risk: James Slaughter


With reinsurers and insurance-linked securities (ILS) players eager to increase efficiency and get closer to the original source of risk, James Slaughter, Senior Vice President (SVP), Director of Global Reinsurance Strategy at Liberty Mutual, expects capital to move further along the value chain.

With prices continuing to decline across the global reinsurance market, albeit it a slower pace in more recent times, reinsurers and ILS market players are eager to reduce costs and increase efficiency across the board, a desire that has driven focus on the risk value chain.

Addressing an audience at the 2016 Monte Carlo Reinsurance Rendezvous, as part of a panel during the Standard & Poor’s (S&P) roundtable event, Slaughter highlighted the slight collapse of the value chain of risk, relating to the way the dollar of risk premium finds its way to capital.

Slaughter stressed that the capital that’s finding its way into market, both from traditional sources and the expanding volume of alternative reinsurance capital, is really after one thing, being “insurance risk in a pure form that’s diversifying and, to do that, the extension will be that it comes further down the value chain.”

“At the moment it’s three, four, maybe five steps (risk value chain), and each one of those costs money, and that total cost, just by our reckoning, is 40 to 45 cents in the dollar, just to get that to the right capital, basically,” said Slaughter.

“If you can bring that down, you can go back to the original customer and say I’m selling that for 80 cents on the dollar, so the original policy, because I can access that capital and I can distribute that risk more efficiently. And for companies like Liberty that’s a real challenge, that’s a real opportunity for us, and it’s a real opportunity for the reinsurance industry to work out how they can partner with us, in that way,” he continued.

Artemis has discussed a number of times how ILS funds and managers, as a result of increased understanding, knowledge and sophistication with insurance risks, have shown a desire to get closer to the original source of risk, essentially jumping the value chain in order to increase efficiencies drive business opportunities.

With each step in the value chain adding cost, it’s not surprising that market players are looking at ways of reducing the steps from capital to risk, a trend that has also created a need for intermediaries, whether this be brokers, reinsurers, and other service providers, to look at ways of adding value in order to remain relevant and competitive.

ILS players, via MGAs and fronting arrangements, for example, are increasingly looking to get closer to the original source of risk, which breaks down the value chain and provides both challenges and opportunities for themselves, and others in the risk value chain.

But reinsurers can also benefit from getting closer the primary source of risk, and as returns continue to be pressured and expenses remain high, it will be interesting to see what approaches reinsurers and ILS adopt in order to reduce costs and increase potential returns, via disrupting the risk-to-capital value chain.

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