Nephila Capital, is building itself a more direct pipeline to access catastrophe risks with its recently established MGA, Velocity Risk Underwriters LLC, evidence of which can be seen in the firms plans to participate in a takeout of wind only policies from Florida Citizens in 2016.
The largest asset manager in the insurance-linked securities (ILS) space, Nephila Capital, which manages around $9.5 billion of assets invested in catastrophe risk, weather risk and related insurance and reinsurance linked securities, has been following a strategy in recent years that sees it bringing its capital closer to the ultimate source of risk.
The relationships the manager has built with program and fronting specialist State National, its arrangement with Amwins, as well as work it has done with Amrisc, all hinted at this strategy and the Velocity Risk Underwriters managing general agency (MGA) takes this to the next level.
With conditions in the reinsurance market challenging, with rates down and competition high, the business that typically gets shopped around at reinsurance renewals is becoming less attractive to investment managers that need to make their investors an adequate return.
One way to reduce the reliance on the typical syndicated reinsurance renewal cycle is to go out and find ways to source risk more directly for yourself, something Nephila has become adept at doing.
Of course it helps to be the largest player in the capital markets backed collateralised reinsurance space, making Nephila a meaningful player in the property catastrophe reinsurance market and also the largest single source of efficient ILS capital on the planet. That opens doors and helps to build strong relationships that have helped Nephila as its strategy of getting closer to the risk has progressed.
Now, with the build out of Velocity Risk Underwriters, Nephila Capital is looking to secure itself access to a pipeline of property catastrophe business, which it will not have to bid for or go up against the traditional reinsurance market to win a place on the renewal slip.
Led by CEO Phil Bowie, a former Willis Re North America property casualty broker, Velocity Risk Underwriters is headquartered out of Nashville, Tennessee.
Nephila Capital has been busy hiring a team of experienced professionals to get Velocity up and running, with the majority having experience in the agency, MGA, distribution areas of primary property and commercial insurance.
We understand that technology is going to play an important role for the MGA, with Nephila hoping that it can gain an edge over other MGA’s by developing its own advanced systems to help it manage risks. Other services such as claims management are set to be outsourced.
We understand that Velocity is yet to enter into any deals, but that the MGA is working on participating in the early 2016 policy takeout from Florida’s Citizens Property Insurance.
These takeouts can enable large amounts of catastrophe exposed property business to be taken from Citizens as a single transaction. We understand that in the case of the February 2016 takeout, Velocity Risk Underwriters will participate via State National Companies insurer National Specialty Insurance Company.
More than 50% of the risk from this takeout, which involved Florida wind-only policies, is expected to be involved in a reinsurance transaction with an “unauthorized reinsurer” according to documents from the Florida insurance regulator.
That is likely the reinsurance agreement that will see the bulk of the property catastrophe risk reinsured back to Nephila vehicle Ananke Re, allowing it to then consume the risk into its range of reinsurance-linked investment funds.
The takeout has been approved and could include as many as 17,534 wind-only Florida property insurance policies, we understand. As part of the takeout process, insurers are able to select the types and locations of property, to a degree.
After taking out the policies, the State National owned insurer National Specialty will enter into a fully collateralised quota share reinsurance agreement with Ananke Re for as much as 100% of the risks involved.
The takeout has been applied for through the new MGA, Velocity Risk Underwriters, demonstrating another use for this platform for Nephila.
As the Velocity MGA platform ramps up it is likely to help Nephila gain access to new risks that would otherwise have been syndicated into the reinsurance market, so this strategy does disrupt the traditional insurance to reinsurance value-chain.
That’s the best way to extract more of the risk premium from the business it ultimately underwrites and invests in for an ILS manager like Nephila. As a trend, extracting more of the value from the risk underwritten is being seen across the insurance, reinsurance and ILS space. Nephila is among the most innovative here.
By adopting this strategy the efficiency inherent in ILS capacity can be passed further down the chain to benefit the ultimate insurance consumer more effectively. Before, by backing simply syndicated reinsurance and retro the efficiency benefits were largely taken up by cedents, but now the benefits of efficient capital can flow through the value-chain more easily.
Of course this efficient model also benefits the capital providers and investors as well, taking pieces out of the middle of the insurance distribution chain, which reduces the cost to get the capital to market. As such this strategy benefits both ends of that chain and shortens the steps taken to get the capital to the risk.
With the State National relationship providing access to rated fronting paper, the MGA can source risk to be underwritten efficiently and transferred into Nephila vehicles through reinsurance arrangements. That gives Nephila the ability to originate its own risk and is a trend that heralds further industry disruption and innovation.