Dinos Iordanou, Chairman and CEO of insurance and reinsurance specialist Arch Capital, said that the investment-oriented reinsurer, or hedge fund-backed strategy, could be the “future of the business” as companies look to marry underwriting with investment expertise.
Speaking at the Marsh & McLennan Young Professionals’ Global Forum 2015 yesterday, Iordanou discussed the capital inflows that have occurred in reinsurance over the years. He mentioned the hedge fund backed reinsurer strategy as a fourth wave, and one which he expects to become increasingly prevalent.
Iordanou discussed the marriage of alternative investment expertise with an existing reinsurance underwriting franchise, concluding that such business models could present the “future of the business.”
This is a view held by a number of other senior players in the insurance and reinsurance market currently, who look to the ability to better balance and optimise income by taking a total return approach to re/insurance business, leveraging both investments and underwriting.
“The idea here is to see if we can create enterprises that will take both asset risk and liability risk on the same balance sheet at the same time, and do we have investors willing to take that risk? The answer is yes,” Iordanou explained.
Arch itself has its Watford Re joint-venture reinsurance firm, which focuses on longer-tailed casualty risks and works with asset manager Highbridge Principal Strategies, who invests the reinsurers assets in hedge fund style strategies.
Watford Re is an attempt to leverage third-party capital from investors to create an efficient and lower-cost source of underwriting capacity, while also outperforming on the investment side to create an attractive total return.
It helps Arch to become a larger partner for cedents, as Arch and Watford sometimes underwrite alongside each other. But it also provides a way for Arch to pass on risks that are less suitable for its own capital, to the more efficient capital within Watford Re.
So Iordanou is well positioned to speak on the future of the hybrid, investment-oriented reinsurance model, and how it may become a more dominant strategy within the industry.
“You need three ingredients to create a successful company: capital, underwriting expertise and investment expertise,” he explained on the set up of Watford Re.
The idea behind the launch of Watford Re was to find an answer to the question; “Could you create [an entity] where in a fashion you only pay for services when you use them?,” he continued.
“For the first time we are seeing capital willing to enter the business without owning all the personnel necessary to operate the company. I believe this model has tremendous advantages.
“Knowledge is king. This is a knowledge-based business and the capital, independent of what form it takes, is going to look for that expertise. Those who can provide that expertise will be the winners in the future – whatever the structure,” Iordanou concluded.
The future of the business is unlikely to be the pure hedge fund-backed reinsurance model we see a number of today, but a total return approach across investment and underwriting, leveraging services when required, is a model that could dominate.
A perfect example of this hybrid approach launched last week, with Richard Brindle’s Fidelis Insurance Holdings promising to flex the business strategy depending on opportunities in underwriting and asset management.
Arch has taken a leap in that direction with Watford Re and it’s expected that other companies will increasingly follow suit, as reinsurers pursue a goal of efficiency and extracting as much premium out of the risk they underwrite as they can.