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How to respond to ‘biblical flood’ of reinsurance capital: Andrew Kendrick, ACE


Andrew Kendrick, the President of ACE European Group, discussed what the influx of new and alternative reinsurance capital means for the London insurance and reinsurance market in an Insurance Institute of London lecture held at Lloyd’s on Tuesday (14th October).

18 months ago Kendrick spoke to an IIL lecture audience and raised the topic of “fast capital”, that the new capital entering the reinsurance market is more mobile, cheaper and quicker to deploy than ever before. At the time he said that London could not avoid this trend, as we detailed at the time in our article titled “Fast capital? Welcome to the ‘new normal’” and he returned on Tuesday offering some thoughts on what the influx of capital means for the London market.

Kendrick said he wanted to take a very factual look at the alternative, or third-party, reinsurance capital trend and offer ideas for how traditional underwriters and brokers in the London insurance and reinsurance market could respond to it.

“This flood of capacity feels biblical in its proportions,” said Kendrick as he explained some of the numbers around the growth of insurance-linked securities (ILS) and alternative reinsurance capital, as well as some predictions for its future growth.

The impact of alternative capital reaches far outside of just the property catastrophe reinsurance marketplace now. The effects are no longer confined to reinsurance, Kendrick explained saying; “The arrival of so much capacity is now disrupting the usual dynamics of the wider insurance marketplace.”

The London market has been affected by new traditional capital, as well as feeling the effects of the alternative and ILS market, said Kendrick. With new players coming into the market to launch new syndicates, as well as new quota share agreements and broker facilities changing how capital enters the market, the pressure on London and Lloyd’s players has never been greater.

Investors search for uncorrelated returns remains probably the most significant driver of this new capital entering the insurance and reinsurance space, said Kendrick. Reinsurance market conditions are of course another driver of capital and the formation of facilities such as broker arrangements, as it is increasingly hard to win business in difficult economic conditions when little in the way of new insurable exposure is being created for the market to absorb.

These conditions, of investors increasingly entering what has now become a new and diversifying asset class, alongside difficult and competitive market conditions caused by excess capital and lack of new opportunities to deploy it, have; “Merged together to create the perfect storm,” Kendrick said.

While some investors may be considered opportunistic and less likely to stick around after loss events, Kendrick acknowledged that the pension funds who allocate to the ILS and reinsurance space control huge amounts of capital and are typically long-term investors.

So Kendrick does not expect all alternative capital will flee the market post-losses. At the same time he expects traditional capital interest and investment into London from emerging markets will continue to grow and the trend towards broker facilities seems to be continuing, which all suggests a continued glut or over-supply of capital.

Kendrick noted that there have been a number of ‘alternative’ market start-ups which have been aborted and that this might highlight that it has become increasingly difficult to source “convincing underwriting opportunities.” It’s worth noting that these are likely some of the start-up hedge fund reinsurers which have failed to come to fruition and our sources have suggested that most of these were found lacking in the business plan department.

Kendrick said that it is important to recognise that investors’ “Appetite for insurance risk is finite – and so the flow of capital is likely to be finite too.” However, now that we are in this era of “fast capital” it’s important for the London market to have a strategy to respond to it, said Kendrick.

Firstly Kendrick said it was important for the London insurance and reinsurance market to recover its creative streak. Risk managers increasingly face difficult and non-traditional risks in their businesses and the re/insurance market needs to support their needs and provide solutions, whether insurance or risk management based.

However, Kendrick questioned whether the London market is in danger of “losing its mojo”, adding that he is concerned that; “London may not be punching its weight by leading the development of some other emerging risk solutions.” He said that he believes that London can do more to build specialisms in risk classes such as cyber and environmental exposures and that there is a need for service providers to work together to ensure this happens.

Kendrick said that it is important to remain cognisant that there is a risk of an uneven playing field developing and that regulatory arbitrage could emerge. Regulation must encourage London’s entrepreneurial spirit, while not losing any flexibility that clients need or losing any business to alternative capital markets.

It is also important to “wake up to the value of superior service” said Kendrick. The new capacity entering the reinsurance market “Will separate the men from the boys,” Kendrick explained. This could result in some smaller subscription underwriters, who do not have the capacity to lead, being squeezed.

This is the risk of marginalisation that we have written about extensively, that following underwriters are likely those most at risk from the entry of new capacity and ILS, as well as from the excess traditional capacity which is ramping up competition. Alongside capital and capacity, new buying habits from cedents, who are increasingly bundling treaties and also buying less cover from fewer, larger reinsurers, will also squeeze these players.

“A hedge fund cannot, at least on its own, act as a true partner to an insured, successfully providing consultancy, risk management planning and – in a word – service. So if we are to differentiate ourselves from the newer alternatives, then I believe that traditional players will need to become more customer-centric,” Kendrick continued.

It’s how insurers and reinsurers respond to challenges from new capital and competition that is critical, Kendrick said, as burying heads in the sand and punishing customers for someone else’s superior service is a sure-fire road to irrelevance.

Kendrick clearly sees the need for the London market to innovate and adapt to develop new products and ways to deploy capacity, while at the same time providing ever better customer service, as a strong response to the threat posed by alternative capital and new traditional capital entering the market.

It is particularly key that innovation targets an expansion of the market and the universe of insured (or covered) risks, so as to allow for some of the excess capital to be put to work.

In conclusion, Kendrick said that capital and capacity trends will continue to radically reshape the London marketplace and it’s how the market responds that will determine its future. His concluding sentences say it all:

But we aren’t playing a zero sum game. This isn’t time to pull up the drawbridge and retreat into the cosy comfort of the past. That approach may not lead to sudden death, but it could bring a slow, terminal decline.

Instead we need to take advantage of the opportunity that this new capacity brings to stimulate our risk appetite and creativity and to ensure that London leads from the front in finding new solutions for emerging risks.

The capital influx also means that London needs to rethink its approach to service to differentiate itself from some of the new entrants. And nowhere is that more important than in claims, where we have a few hundred years of competitive advantage and a distinctive reputation we must protect and build on.

Also read our article covering Kendrick’s speech 18 months earlier: Fast capital? Welcome to the ‘new normal’.

You might find these articles interesting for discussion of how reinsurers can respond to the current market and the competition posed by ILS and alternative capital:

Innovate or perish. A message for insurers and reinsurers from Aon.

Brokers face disruption too in challenging reinsurance market: PwC.

A smarter, more client-responsive reinsurance market: Willis Re.

Differentiate or consolidation ahead for reinsurance industry: PwC.

Innovate & adapt to navigate a reconfigured reinsurance industry: S&P.

Structural change, lower margins, a deeper reinsurance convergence.

Citi Group highlights insurance securitization as a disruptive innovation.

Proactive innovation through ILS is driving change in reinsurance.

Insurance-linked securities market calling for innovators: PwC.

Innovative and client focused approach required to drive growth in ILS.

Register today for ILS Asia 2023, our next insurance-linked securities (ILS) market conference. Held in Singapore, July 13th, 2023.

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