The problem with the global reinsurance market today is not the abundance of capital from both traditional and alternative sources, but a lack of sufficient demand for reinsurance protection across the globe, according to Des Potter, Head of GC Securities, Europe, the Middle East and Africa (EMEA).
The persistent flow of capital into the reinsurance industry from traditional players and increasingly alternative capital providers has heightened competition in the space, ultimately contributing to the reduction of rates and fuelling discussions of a supply/demand imbalance.
As a result, numerous industry analysts and experts have suggested that in order for the softening landscape to begin to turn, a substantial and likely unprecedented single market event, or a series of large aggregated loss events, is likely needed in order to remove some of the capital from the overcapitalised sector.
But not everyone in the space shares this view, and instead elects a more optimistic and opportunistic approach to the abundance of capital and apparent lack of demand for reinsurance protection.
“I take a little bit of a different view. I think the issue today is not one of excess supply of capital; the issue today is insufficient demand for reinsurance,” said Des Potter of GC securities, speaking on a panel at the Guernsey arranged ILS Insight event held in Zurich at the start of July.
Potter explains that the reinsurance and insurance-linked securities (ILS) market has a very real and vast opportunity to provide solutions to areas that perhaps are unable to tap the marketplace for capacity, in order to obtain much-needed protection.
“And I’m not talking about emerging markets, I’m talking about mature markets that are underinsured, I’m talking about government purses who are bearing a disproportionate amount of natural catastrophe and other related risks on their own balance sheets,” said Potter.
A good example of this can be seen with California (although it applies to numerous regions in emerging and mature markets). If a significant event occurs in California the state has the potential to go bust, which would mean the Federal Government would then be required to bore the reinvestment costs that will ultimately help sustain that community.
“And the reinsurance market, with the ILS market, has got tremendous capacity to provide solutions to these areas, as well as to support emerging markets that really do need a low cost insurance product,” continued Potter.
The issue with California is that the take-up of earthquake insurance is extremely low, meaning that if a large quake took place the portion of the overall loss borne by the insurance and reinsurance industry would be minimal, meaning the state, and ultimately the taxpayer would foot much of the bill.
And this is the case in numerous parts of the world, in both mature markets, like U.S. quake and U.S. flood, and also emerging markets like Asia, Africa, and Latin America, for example.
The challenge then is for insurers, reinsurers, and importantly ILS players that bring efficient and innovative structures to the risk transfer landscape, such as catastrophe bonds, to establish affordable and effective solutions that enable greater insurance penetration in underserved peril regions, both emerging and developed.
“So I think the opportunity is not to moan about excess capacity, the opportunity is to continue to work hard to find ways to increase reinsurance demand,” reemphasised Potter.
It’s an interesting point of view, and one that underlines the potential for the re/insurance and ILS space to continue to innovate and work to create solutions that in the first instance provide needed protection, while at the same time put to work some of the capital that’s currently just sat in the marketplace, offering no protection to anybody.
Potter explains that investor demand for the non-correlation features of the asset class is huge, highlighting that so long as the right products are developed the wealth of capital market investors interested in the space, would likely be happy to provide ample capacity to protect underserved, and underdeveloped parts of the world.
Furthermore, the creation of products for underserved and vulnerable parts of the world also helps to expand the reach of reinsurance and ILS and grow the overall risk transfer landscape, at the same time as making efficient protection available to those that need it most.