Cortina: Just a soft market trend, or clearing the floor for reinsurance’s next act?

Cortina has raised a lot of questions in the market, as to whether the recently launched Aon structured and Blackstone backed reinsurance facility at Lloyd’s is simply the latest iteration of a soft market trend and evolution of following, tracker style capacity, or something more portending of future market developments.

There’s a fascinating metaphor buried in the name Cortina, one that we completely missed. Kudos to the analyst team at J.P. Morgan led by Kamran Hossain for spotting it, bringing it to our attention in their latest report and providing the inspiration.

A Cortina is a specific tango-related phrase, a brief musical interlude within the Argentine milonga (a social tango event), used to signal the end of one dance, the clearing of the floor for a new set of dancers, and it often signals a structural change to the rhythm that has been played.

Apply that to reinsurance and the Lloyd’s market and Cortina becomes a signal of something potentially more meaningful and perhaps ominous, than just an extension of Aon’s Client Treaty with a single backer.

The use of lead-follow capacity strategies at Lloyd’s is not new, in fact the market has been dancing to the same rhythm for decades.

This has relied on a deep network of pure-play reinsurers, falling into line behind a lead underwriter.

While the recent launch of Cortina syndicate 1956 gave little away in terms of the thinking behind the structure or strategy, aside from it being a way for Blackstone (third-party capital) to secure preferential access to a large amount of reinsurance business from Lloyd’s, and for Aon to better serve its clients with capacity, the applicability of this tango-related metaphor is perhaps striking.

Cortina could act as the market’s musical break, signalling a fundamental and maybe structural shift in who provides follow capacity and on what terms. Introducing a dynamic that may play out across the risk transfer ecosystem (much more broadly than within the Lloyd’s market alone) with ramifications for incumbents across reinsurance.

Going back to the metaphor, in tango the Cortina is when the musical lead orchestrates the dance, cuing up a new rhythm or genre and structurally changing the flow of the evening.

In reinsurance, the broker’s are increasingly orchestrating the flow of capital and how it gets matched with risk.

By arranging a facility like Cortina, which has the ability to automatically write 3% of eligible property catastrophe excess-of-loss treaties and 5% of other eligible treaties arranged by Aon, the broker is actively curating the flow of premium to meet the needs of large capital providers.

Aon is routing efficient, lower-friction institutional capital increasingly directly to the risk, bypassing the more traditional open-market syndication.

If the Cortina strategy delivers for all parties, returning structural savings to cedants as a dividend-style discount to lead terms, delivering returns to the investors and importantly adding value for the brokers, then we can expect more of these structures to be cued up. Back to the metaphor.

You could say that, the brokers are dictating the playlist and adjusting the rhythm of the reinsurance market, and alternative capital is increasingly their preferred track.

Sticking with the tango, when the Cortina gets played it also signals a separation of the previous sets of partners.

In follow-form facilities and broker facilities, traditional reinsurers and syndicates have often relied on the flow of premiums they deliver, as passive and often lucrative access to flow business can be a meaningful addition to their own underwriting efforts.

With the use of the Lloyd’s infrastructure, alongside insurance-linked securities market plumbing in the form of the London Bridge 2 structure, initiatives like Cortina could bring in institutional and private credit-like asset management giants in the place of the more traditional capacity partner.

Returning to the tango metaphor again, through Cortina, Blackstone can channel capital onto the dance floor without the operational friction, legacy liabilities, or high expense ratios associated with building a standalone reinsurance franchise.

They are not there to debate the steps, they are there to execute their strategy (dance) algorithmically, strictly following the lead underwriter’s terms and claims decisions.

This represents a further commoditisation of follow capacity by the ILS and alternative capital markets, although it also has broader ramifications outside pure follow-form strategies.

When the Cortina plays in an Argentinian dancehall, it never signals the end of the night, but it does signal a changing, or mixing of the dance floor’s participants and fundamentally, sometimes structurally, resets the room.

There are potentially significant implications of course, for those operating within Lloyd’s and perhaps beyond.

The strategy has implications for anyone relying on follow-form access to premiums, especially syndicates that lack the specialist expertise to consistently lead complex placements in the underwriting market.

Access to risk could be reduced, while the ability of the broker’s to reliably fill large amounts of a slip with efficient institutional capital could reduce some market participants pricing power and relevance.

Those with the capability to price and lead on underwriting, while setting the terms and managing the claims in the process as well, may be able to command a premium, which does have the potential to bifurcate the market to a degree.

Back to our tango metaphor, incumbents will need to be able to justify their expense ratios through top-tier underwriting talent and proprietary data, as those that are unable to lead the dance may struggle to secure their spot on the floor.

Efficient following capacity at scale from players with potentially lower costs-of-capital also introduces a new pricing dynamic into the reinsurance market.

Over-time, developments like this that become more widespread have the potential to compress pricing, make premium harder to come by and force incumbent reinsurers to compress their own margins to compete with the efficiency of institutional capital deployed through low-friction vehicles that borrow techniques from the insurance-linked securities market structure and form.

Follow capacity, so-called ReShares and now increasingly we hear people in the market talking about indexing to meet large investors appetite. The broker that enables investors to access index-like returns more efficiently in reinsurance stands to gain a lot of power, which makes it a prize worth pursuing and this is starting to generate real attention it seems.

It’s unclear at this stage whether Cortina is simply the latest remix of an old and established dance tune, or something more radical and heralding of real change, in the rhythm and flow of the reinsurance market.

As broker’s own analytics, data, technology and pricing capabilities accelerate and become increasingly powerful in their own right, it does also raise questions over who is actually leading the dance these days and will be in future?

Cortina syndicate 1956 sends yet another clear signal that the convergence of alternative, institutional capital and traditional reinsurance continues to evolve beyond the typical ILS structures we’ve seen for years and now occupies a growing role in the everyday flow of syndicated placements as well.

For the traditional market, Cortina signals it. The music has changed and it’s time to learn the correct steps for a new rhythm that is being played.