Geoff Lubert, Executive Vice President (EVP), Managing Director, Willis Re Canada, recently highlighted the potential for mutual insurance companies to utilise insurance-linked securities (ILS) capacity to diversify their overall reinsurance placement.
Speaking with A.M. BestTV at the 2018 Meeting of Reinsurance Officials (MORO), a conference organised by The International Cooperative and Mutual Insurance Federation (ICMIF), the reinsurance broking sector executive alluded to a discussion from one of the conference’s panels, which explored mutuals using catastrophe bond transactions for their risk transfer needs.
“I think that first blush, a lot of people would think that’s a departure from what a mutual has done traditionally, and we’ve got long-standing partners that we wouldn’t want to walk away from.
“However, you can look at it the other way, and say, well what’s the end benefit of potentially using alternative and innovative capital to then deliver a better cost-effective solution to the end policyholder,” said Lubert.
It’s a valid point, as although long-standing relationships are important for mutuals and their traditional reinsurance partners when placing their programs, the use of innovative and efficient third-party reinsurance capital offers diversification within the overall reinsurance placement.
Lubert highlighted that, for mutuals looking to diversify in niche businesses it’s important they look to diversify their reinsurance placement, in order to ensure they don’t become too concentrated in one area.
A catastrophe bond transaction as part of an overall reinsurance placement could provide just that, enabling a mutual to work with their reinsurance partners for some of their risk transfer needs, but tap the capital markets for an additional, supplementary slice of diversifying, efficient capital.
“What we’ve seen in the market is maybe not individual cat bonds by mutual players but looking at cat bond lite facilities, where they can diversify their overall placement. So, they may only put 20% in a cat bond but leave 80% with their traditional reinsurance partners,” said Lubert.
Utilising both traditional and alternative sources of capacity to increase both the efficiency and diversification of a reinsurance placement is an approach used by numerous primary insurers, a trend that has become more and more common place as ILS has continued down its impressive growth path.
While accessing the capital markets for a portion of their risk transfer needs might not be the traditional way mutuals have done things, if such an approach can improve returns for owners while delivering greater cost-efficiency to the end policyholder, then it seems sensible for mutuals to explore the expanding ILS space.
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