Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Innovation, willingness needed for ILS to access new risks: Tom Bolt


To alleviate some of the competitive pressures in the softening, global reinsurance market, participants need to stop competing over well-understood exposures, and start “making some new pies” so that traditional and alternative capital can access emerging risks, says Tom Bolt.

The wealth of alternative reinsurance capital in the sector has continued to expand, with the most recent estimates putting its volume at around $70 billion.

However, as noted by numerous industry experts, analysts and executives in recent times, including Lloyd’s of London Director, Performance Management, Tom Bolt, it’s headway into emerging, unmodelled, and less understood risks has been limited.

“One of the problems we have in the market, which is reasonably soft it’s fair to say, that’s because we are all doing a great job at competing on the things we already know how to do,” explains Bolt.

It’s a fair point, and a reality that isn’t too surprising when you consider that the institutions providing the alternative capital, largely pension funds, hedge funds, and life insurers, are entering the reinsurance business primarily to access diversified returns from a largely uncorrelated asset class.

Furthermore, the alternative capital providers aren’t typical risk takers to the same nature as the traditional insurance and reinsurance players, more providers of capital seeking diversification and profit.

To set alternative capital onto a new path and in the direction of emerging risks, Bolt highlights the need for market innovation, and a willingness of firms to step outside of their comfort zone.

“You have to quit competing over a bigger slice of the pie, and you need to start making some new pies,” explains Bolt, continuing to stress that one of the best ways to create new pies, or solutions, is to listen to what the customers want.

“The better we listen for what they want the better off we’ll be. There is no end of emerging risks, but there does seem to be a little reluctance to step outside of the box from what you normally make,” added Bolt.

The necessity of the insurance, reinsurance, insurance-linked securities (ILS) and wider risk transfer landscape to innovate, drive public-private collaboration efforts, and develop solutions to protect against emerging risks, improve global disaster resilience efforts and lower the burgeoning protection gap, has been a hot industry topic recently.

But as much as it’s a challenge to utilise the glut of alternative reinsurance and traditional capacity beyond competitive business lines, like U.S. property catastrophe risks, and into emerging markets in Asia, and emerging risks like cyber, it’s also a significant opportunity for firms to get ahead of the pack and secure relevance in an increasingly tough operating environment.

Bradley Kading, President and Executive Director of the Association of Bermuda Insurers and Reinsures (ABIR), highlights the opportunities companies are faced with in the sector.

“For the policy makers that are working with regulators out there, you have the opportunity of a lifetime in front of you here. You have alternative capital to the tune of $70bn now in the market, expected to grow to $120 billion to $150 billion within 5 years, according to some estimates,” explains Kading.

The opportunity, Kading continues, is to move much of the insurance risk out of government programmes, “as is being done in the UK with Flood Re and Pool Re, being done in Florida to great success with the Florida residual markets, which have depopulated by 50%, and with the Florida cat fund buying its first-ever $1 billion cat reinsurance protection.”

Furthermore, adds Kading, initiatives by organisations, like the G20’s goal to increase insurance penetration levels by 400 million policyholders by 2020, and others, presents vast growth and diversification opportunities for market players, while also helping to increase global disaster resilience and improve insurance penetration levels.

Initiatives such as this, and the depopulation of government insurance and reinsurance programmes is all the more possible because of the growth of third-party reinsurance capital, explains Kading.

“That only happens because alternative capital is available, so we’ve got to make sure that the policy makers, the regulators, the companies are aligned, make sure to see if this capital can be put safely to work in taking on risk, whenever the opportunity’s there,” says Kading.

Developing tools and structures to facilitate the transfer of alternative reinsurance capital away from existing, easy to understand, well-modelled, competitive risks, and into emerging, new exposures is a trend that will benefit the providers, intermediaries and crucially the policyholders.

The lack of available and adequate solutions for emerging, complex risks like cyber in the developed world, and a host of natural catastrophes in underserved and underdeveloped regions, like parts of Asia and Latin America, is an opportunity for traditional and alternative reinsurance players to grow, stay relevant, and protect the vulnerable against an ever-expanding range of local and international risks.

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