The ‘so-called new capacity’ that has come into the reinsurance market in the form of institutional backed money from the capital and insurance-linked securities markets will be sustained, even after a major catastrophe event, according to Steve Hearn of broker Willis.
Hearn, the Chairman and CEO of Willis Global, was discussing the growing influence of alternative capital in reinsurance during the insurance and reinsurance brokers earnings call yesterday. Hearn acknowledged that it is an interesting time to be in reinsurance but said that the new capital and capacity brings opportunities to a broker like Willis Group, in terms of its advisory and capital markets services.
Before Hearn spoke, CEO of Willis Group Dominic Casserley was asked whether the influx of new capital and capacity had an effect on the bottom-line for a broker such as Willis and whether the disruption it is causing among reinsurers might spread to the broker community as well.
Casserley responded; “We do believe that, actually there are some interesting analogies here, we are starting to see the evolution of capital in the industry, start to move the question about intermediation to disintermediation. As an intermediary involved in that we do see plenty of opportunities but it does require us to be fleet of foot and be the analyst or providers and helpers to our clients.”
The question of whether ILS and alternative capital can ‘disintermediate the intermediaries’ is one that is expected to come up increasingly frequently over the coming year. With reinsurance prices on a steady decline and yet to find a floor, brokers will find that their fee income must gradually be reduced as clients push for ever lighter brokerage charges in order to feel like they continue to get value from a reduced cost purchase.
Equally the introduction of larger programs and transactions, meaning fewer but bigger deals, could also have an impact on brokers bottom lines. At this time the brokers are keen to push their advisory expertise in helping reinsurers to utilise and manage the alternative capital, but whether that will be sufficient to offset any impact to their fees from declining rates is yet to be seen.
Hearn then commented on reinsurance market conditions and the outlook for reinsurance broker Willis Re, saying; “We did have another great quarter in Willis Re, another great quarter for that business which has performed attractively over the years. And then it is unquestionably, as you say, an interesting environment in terms of rating in the reinsurance space and obviously influenced by what’s going on in the ILS space.”
Hearn does not believe that the current trends will make a noticeable dent in Willis’ earnings. He explained; “Don’t necessarily draw the conclusion that you’ll see that impact directly on our reinsurance business’ performance. We continue to grow through new business, acquisition business from competitors, we do have some fee based earnings in some of the larger reinsurance buyers and clients, as Dominic said in his remark, do often take the opportunity to track the rate and in fact buy more.”
In terms of a longer view of how the new capital will impact the reinsurance market, Hearn is of the opinion that it is here to stay. “We think, I think, that the new, so called new capacity, that’s coming into the reinsurance world will be sustained in my opinion,” he continued.
On the topic of the sustainability or stickiness of this new capacity, particularly in the event of a major disaster, Hearn feels it is here to stay, saying; “I think those who have a prognosis that in the event of a major catastrophic event that it will be fickle capacity, I don’t actually agree with that. I think it has sustained impact and that just becomes a matter of pricing.”
Hearn explained that at Willis the evolution of the reinsurance market and the introduction of the capital markets in the form of ILS and new capacity is seen as an opportunity to be taken.
Hearn said; “For us we embrace that and can see this is an opportunity. As people start to embrace this new capacity they often need advice and that’s exactly what a reinsurance intermediary does and again using the full weaponry of Willis’s global capability including the obvious one of Willis Capital Markets, that we see this as an opportunity, in fact a great connection between those businesses that are a very important part (of Willis) as things are shifting.”
It’s not just reinsurers that need to position themselves as ‘alternative capital friendly’, it may be even more important for brokers to do so. At brokerages such as Willis the capital markets units are becoming increasingly important and relevant at renewal time and in conversations with clients. In future, it is likely that all brokers will need at least an understanding and some expertise in utilising the capital markets as risk transfer tools for their clients. The capital markets units at brokers, once small and extremely specialist, will likely find themselves as one of the key pieces of the broker offering in years to come.