Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Excess reinsurance capital can benefit society – Guy Carpenter


As the European reinsurance industry meets in Baden-Baden, to discuss the upcoming January renewal season, the focus is not solely on pricing and some are highlighting the positive contribution that reinsurance and risk capital can make to society.

Too often the reinsurance conference season, which seems more like a PR-laden roadshow each year, sees the PR output and discussion focused on pricing, conditions and general hand-wringing about the state of the market and the threats posed by new disruptive competitors.

But reinsurance broker Guy Carpenter has tried to break the mold, focusing its Baden-Baden symposium event on the protection gap challenge and highlighting the important role and opportunity for reinsurance capital to support society in addressing the coverage gaps that exist.

Chris Klein, Head of EMEA Strategy Management at Guy Carpenter, and moderator at the Baden-Baden event run by the broker, explained; “Each year at Monte Carlo we seem to talk about the negative effects of an excessive supply of reinsurance capacity.”

Klein went on, explaining that what is really important and presents an opportunity to a reinsurance industry that had been under pressure, is “How we can put that capital to good use for the broader benefit of society.”

“Everyone wins when we work together to provide effective solutions to the public sector,” Klein continued.

Martyn Parker, Chairman of Global Partnerships at global reinsurance firm Swiss Re explained that the role of reinsurance capital in helping public sector and governments transfer risk is increasing.

“The role insurance plays as a partner to Governments and public sector entities is building, particularly when it comes to providing intelligent contingency financing for catastrophe events,” Parker explained.

This is an area, of course, where the capital markets has some experienced, working alongside organisations such as the World Bank to deliver sovereign risk transfer solutions to countries around the world.

The catastrophe bond and insurance-linked securities (ILS) fund risk capital has backed a number of these efforts and as the engagement between insurance, reinsurance and public sector increases, the opportunity for ILS capital to play a role will also increase.

Parker continued; “Ultimately insurance supports Governments to manage risk resilience and fiscal planning – enabling them to save lives and protect infrastructure, limiting damage to their entire economy.

“Strong insurance penetrations and resilience planning allows the quickest economic recovery post disaster – that’s attractive to investors and businesses.”

Nick Frankland, CEO of EMEA Operations at Guy Carpenter, explained at the event in Baden-Baden that for the reinsurance industry the opportunity is broader than just on catastrophe and weather risks.

“The Protection Gap presents a great opportunity for the insurance and reinsurance industry and it extends far beyond the catastrophe segment. There are challenges of new risks in other areas including technology, science, medicine, climate change, population growth, food security and urbanisation,” Frankland explained.

Emmett Soldati, Chief Product Officer at Weather Analytics, agreed and said the debate needs to be opened up to cover a holistic view of risk that requires protecting against with insurance and reinsurance capacity.

Soldati commented; “We need to move beyond the debate about how the climate is changing and what is causing this, and instead focus on ecological change. Ecological change highlights the other side of the climate equation – geography, technology, and human behaviour – and puts it in context where it matters when we think about perils and hazards; because at the end of the day all risk is local.”

Soldati added that information sharing is vital to enable policymakers to understand the opportunity; “The key to resilience – which is not simply about insuring against and recovering after losses, but is also about protecting and mitigating against those losses – is to recognise that information, and the transfer of that information down to the local level, is central to our ability to respond to this change. We need to empower local actors – be they policyholders, municipalities or brokers – with better information to be able to respond. This is how we can work together to close the gap.”

Frankland agreed and highlighted the advanced tools available to the reinsurance industry to assist in closing the protection gaps; “Today we have a better understanding of risk than at any time in history. We have better science, data and analytics, and tools to understand, measure and price risk.”

It’s encouraging to see a continuation of the more positive and productive discussions continue at the Baden-Baden reinsurance meetings.

Opportunity is everywhere for putting risk capital to work, be that traditional reinsurance or from the capital markets. But the effort to understand, educate and inform potential new customers in areas like the public sector, developing markets is a job that needs significant effort and here the traditional market and alternative players need to collaborate to find the right way to sell innovative protection targeted at the areas that really matter to these potential buyers of risk capacity.

In a sector awash with risk capital, reinsurance markets need new opportunities to deploy capacity, brokers need new products to distribute, ILS funds and investors need new risks to diversify into and more capital deployment opportunities, which suggests that alignment can be found between all sides when it comes to addressing the protection gap.

Excess reinsurance or risk capital can help society in many ways, but the industry needs to identify them, select the right capital for each opportunity and become better at selling different coverage structures, such as the parametric trigger.

Often insurable interest is not evident in coverage gaps and it is responsive risk capital that is required. Here the traditional and alternative markets should be collaborating more, as opening up some of these opportunities will help both sides put more excess capacity to work.

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