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Fast capital? Welcome to the ‘new normal’


Third-party investor capitals increasing interest and growing influence in the insurance and reinsurance markets is something that insurers and reinsurers are going to have to get used to as a ‘new normal’, according to the Chairman of ACE European Group, Andrew Kendrick. Kendrick spoke on the topic of ‘Managing the new normal – sustainable underwriting’ to a London market audience at an Insurance Institute of London lecture held at Lloyd’s yesterday (21st March).

As with any good speech on the current insurance and reinsurance underwriting environment the subject of capital markets capacity came up. Kendrick described five characteristics of what he termed the ‘new normal’ for insurers and reinsurers, the new environment in which he believes the insurance markets need to get used to underwriting.

The five characteristics of this ‘new normal’ according to Kendrick are:

  • Pure underwriting profit is increasingly difficult to come by – as evidenced by just four years of underwriting profit for the US property and casualty insurance industry since 2000.
  • A combined ratio of 100% isn’t what it used to be – with insurers typically needing to target a ratio in the low-to-mid 90s to meet the cost of capital in a low interest rate environment.
  • The industry is increasingly awash with ‘fast capital’ – with the global property reinsurance sector reaching record capacity in 2012 and increasing interest from institutional investors.
  • The cost and number of natural catastrophes is continuing to rise – with five of the 14 largest insured losses taking place in the past three years.
  • Securing new revenue streams is a challenge in Europe’s slow growth economy – and risk managers are under increasing pressure to do more with less resource.

Fast capital, the third point above, an interesting term that Kenrick has chosen to use for capital that can be agile, is sourced from third-parties who are increasingly institutional investors and that is quick to deploy. Clearly this is the growing sector that we cover here on Artemis.

On fast capital as part of the ‘new normal’ Kendrick said:

Turning now to the global picture, Guy Carpenter calculates that dedicated reinsurance capital reached a record level late last year – more than 190 billion dollars – despite 2011’s record losses.

Non-traditional capacity is also queuing up for a piece of the action. The alternative sector now accounts for 15% of the global property cat reinsurance market and is set to increase further.

There is also plenty more contingent capital waiting in the wings. Many investors are looking for returns that are less correlated with the wider economy. Interestingly, this includes institutional investors, such as pension funds, who have previously kept away from the property cat sector.

Some talk about hot money, others about naive capacity. For me, we are now in an era of ‘fast capital’, that’s more mobile and quicker to deploy than ever.

Those of us in London certainly can’t ignore the trend. The entry of Nephila into Lloyd’s is a good example of the dynamic at play here. We’d simply better get used to more variable and generally higher levels of fast capital in the new normal.

Kendrick is right. This fast capital is a feature of the insurance and reinsurance market which is going to grow in size and influence over the coming years. As this fast capital also becomes stickier, sitting out the reinsurance cycle, rather than being as opportunistic as it has historically been thought of, the impact and influence it has on the market will only get greater.

Fast capital has different motivations to traditional insurance and reisurance capacity and is not constrained in the same way. However it does need underwriting diligence and skills to help it be deployed in a robust manner, it needs access to quality paper in the same way that Lloyd’s Names used to leverage the market. There’s certainly a way to think about this fast capital evolution in the re/insurance market as not that different to changes seen before.

Kendrick’s speech was all about the need for insurers and reinsurers to strive for sustainable underwriting business models and returns to cope with this ‘new normal’. He didn’t explicitly go so far as to suggest insurers and reinsurers embrace the opportunity that this fast capital offers to them though. We would suggest that the insurers and reinsurers who find ways to embrace new sources of capital, through partnerships, offering underwriting skills and services, leveraging it for their own reinsurance and retrocession needs and using it as a source of underwriting capacity, will be the ones who really find ways to sustain themselves against what some clearly perceive as a threat.

Thinking about third-party capital as a threat is of course wrong. It may be a threat to some traditional business models, particularly those who refuse to or are slow to change, but in all honesty those business models have often had their day and are due for a shake-up anyway and will be forced to move with the market. Business models are going to have to adapt to become more flexible and innovation is going to have to be embedded in these organisations, for sustainable underwriting returns and growth to be achieved.

This is not unlike so many other industries in the business world, where innovation, new capital and funding sources, flexible or lean operational models are being adopted and generally sectors are being shaken-up. The digital generation is causing some of this shake-up in other industries. In insurance and reinsurance the capital flow has been changing and this does have the potential to shake-up this industry to a similar degree. The ‘new normal’ is something that most industries and sectors have been dealing with in recent years and for insurers and reinsurers it appears their time has come.

As we’ve said before many times. Those traditional insurers and reinsurers who embrace and find ways to profit from new third-party capital sources will be the long-term winners as the market continues to adapt to this ‘new normal’.

You can read the full speech by Andrew Hendrick over on the ACE website.

Here are some other recent articles on this ‘new normal’ that may be of interest if you missed them:

Capital flow in the reinsurance market has changed: PartnerRe CFO

Insurance-linked securities (ILS) set to grow its share of reinsurance capacity

Pension fund capital inflows could dampen returns over time: KBW

Innovative and client focused approach required to drive growth in ILS

As ILS investors compete with traditional reinsurers will they stay the course?

Register today for ILS NYC 2023, our next insurance-linked securities (ILS) market conference. Held in New York City, February 10th, 2023.

Artemis London 2022 - Insurance-linked securities conference in London

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