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Original Risk: A Society for Change Agents

In Baden-Baden reinsurance industry focuses on putting capital to work


The reinsurance industry is meeting this week in the German town of Baden-Baden. Each year reinsurers, brokers, alternative capital providers and the insurance-linked securities sector meets to discuss prospects for the forthcoming January reinsurance renewals.

The tone of conversations has changed slightly since the Monte-Carlo Rendez-Vous event in September was dominated by discussion of the influx of alternative capital and how ILS, catastrophe bonds and new capital has been disrupting the reinsurance market, leaving traditional reinsurers facing new competitive threats.

At Baden-Baden the tone has certainly moved towards something more constructive than purely discussing how big a threat alternative capital and ILS pose. Discussions so far tend to revolve around how the make use of this new capital from third-party investors, where it can be put to work and how the ILS and collateralized markets can expand their horizons to new lines of business.

Also being discussed is how traditional reinsurers can adapt and become more flexible, which will help them to offer more value to their clients and should help them to hold onto market share. With peak perils increasingly being covered by ILS and alternative reinsurance capacity, the traditional market is doubling down on securing the opportunities which are most suited to rated balance-sheets.

Expansion and growth opportunity was a theme at the Guy Carpenter reinsurance symposium, held in Baden-Baden yesterday. The event, discussed issues as diverse as the economic to insured loss gap, expanding the remit of alternative capital and ILS into new risks beyond property catastrophe and how to provide reinsurance coverage for emerging risks.

Nick Frankland, Chief Executive Officer of EMEA Operations at Guy Carpenter, commented on the recent focus in the reinsurance market on optimising capital, a topic which has been stimulated by new capital coming into the market as well as economic conditions and regulatory changes.

Frankland said; “Sometimes capital optimization seems to be a euphemism for reducing capital or shrinking to grow,” he said, “but true growth comes from profitable expansion of our business, and our core business is to provide protection through the transfer of risk. We think it is time to refocus on such growth opportunities.”

From a reinsurers perspective the issue of the moment is all about growth and expansion. How to take on new risks, increase penetration of property insurance so as to bring new reinsurance opportunities, emerging risks and how to maintain growth in the sector.

Torsten Jeworrek, Member of the Munich Re Executive Committee and Chairman of the Reinsurance Committee at Munich Re, commented; “Risk transfer is the core of our business as a leading reinsurer. The landscape for risk is undergoing a substantial change which our industry needs to respond to in order to facilitate sustainable growth in line with the demands of the client. This starts with counteracting the low insurance penetration in NatCat risks by increasing risk awareness, building up necessary capacities and becoming a better and more mobile partner than in the past.”

On emerging risks Jeworrek called for the need for cooperation among market participants to create new products and opportunities for all participants in the market. He continued; “On the other side, we see an increased need for the insurance of intangible assets where our industry is not yet able to provide insurance products that respond adequately to the emerging risks of the 21st century. To close the gap, cooperation between primary insurers, brokers, new capital sources and reinsurers is more important than ever.”

Paul Horgan, Global Head of Group Reinsurance and Global CUO of Casualty at Zurich gave an insurers perspective on the need for reinsurance firms and alternative capital providers to address new risks. He said; “It is generally accepted that our industry only offers insurance for about 20 percent of the risks facing our clients today, because insurance products have been too narrowly defined and too limited in capacity to satisfy demand.”

Making use of the alternative capital which has flowed into reinsurance and that which is sitting on the sidelines waiting for a chance to be deployed in the market is important and provides opportunities for insurers, reinsurers and ILS specialists alike. Horgan said that the industry needs to address new, particularly non-catastrophe risks, and that these provide a chance for alternative capital to find a new deployment avenue.

Horgan explained; “The industry must become more comfortable developing products and services that address non-physical risks if clients’ needs are to be satisfied and opportunities found to deploy the new capital entering the market. A key step to achieving this is better data to improve the understanding of exposure and reinsurers are probably in the best position to demand this.”

Luca Albertini, CEO of London-based ILS investment manager Leadenhall Capital Partners, gave a perspective from the ILS and alternative reinsurance capital space. Albertini discussed the need for ILS and alternative capital to broaden its reach and said that some specialist investors are already capable of, and are, moving outside of property catastrophe risks.

Albertini commented; “Capital market investors currently prefer well modeled perils as they struggle to understand how non-modeled perils can be underwritten. However, some specialized investors who better understand the underwriting process for non-modeled perils are starting to enter into the non-catastrophe space by participating in a wider range of opportunities in the insurance industry, such as the marine and energy sector.”

Tom Bolt, Director of Performance Management at Lloyd’s, suggested that the market could be doing more to address some of the emerging risks and that combined efforts between market participants can help to tackle these, creating new business opportunities for all.

Bolt said; “Many emerging risks, as well as contingent business interruption, are not being fully met by current efforts. A greater dialogue between the parties, especially the buyers and underwriters with the help of the intermediaries, would go a long way towards moving new product opportunities forward.”

Klein from Guy Carpenter concurred; “We have been reminded today that supply and demand are frequently mis-matched. Some risks attract too much capacity, while others are under-served or even ignored. The industry must improve its ability to communicate to ensure that clients’ wants and needs are better understood and fulfilled.”

It seems a positive step for everyone that the conversation has been advanced, as the market moves closer to renewals, becoming more constructive and more forward-thinking about how to utilise a well-capitalised reinsurance and ILS market to address new risks and create new opportunities for capacity deployment.

This conversation will benefit all market participants and will give ILS and alternative capital investors confidence that the demand for new sources of reinsurance capital is going to continue as opportunity to put that capital to work increases. With interest in reinsurance from pension funds and other institutional investors strong, there is plenty of capital in search of low-correlated returns which can help the reinsurance sector to expand.

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