New capital that flowed into the reinsurance market from alternative sources, like pension funds and other capital markets investors, is more intelligent than capital seen in previous softening markets, according to one insurance and reinsurance group CEO.
Chief Executive Officer of insurance and reinsurance firm Aspen Insurance Holdings Ltd., Chris O’Kane, said as much in a recent speech to an audience of financial analysts and executives at the Bank of America Merrill Lynch 2014 Insurance Conference, held on 13th February.
O’Kane is not the first senior figure in the insurance and reinsurance market to suggest that those saying that alternative reinsurance capital or ILS investors are naive or lacking in underwriting discipline.
AXIS CEO Albert Benchimol said that alternative capital is not foolish or naive, rather it has sought a fair price for the capital it has provided. XL Group CEO Michael McGavick recently said that alternative reinsurance capital providers and insurance-linked securities managers are more disciplined than many people think.
Aspen’s O’Kane joined in with this sentiment, saying at the event that alternative reinsurance capital is intelligent, in fact sometimes more so that traditional reinsurance capital, as it is more quantitatively driven by getting the right returns for the business underwritten.
O’Kane acknowledged the cheaper cost of capital that third-party reinsurance capital providers have than traditional public quoted equity backed firms. As a result O’Kane feels that the excess margins that have been enjoyed in property catastrophe reinsurance business, particularly in the U.S., have been competed away.
O’Kane said that he expects prices will decline again at the upcoming April and June reinsurance renewals, adding that the question is when will they stop falling, a question he said no one can answer right now.
But O’Kane is not in the camp that think that the new reinsurance capital may be irrational or underpricing risk, in fact O’Kane believes that it could be more rational than some traditional reinsurance capital. He has said before that he thinks that alternative reinsurance capital is entirely rational and his comments last week back that up.
O’Kane said; “I think there is some evidence that unlike previous softening markets, which were driven by a lack of transparency, a lack of technical understanding and excessive supply of capital, that this time the new capital is actually quite intelligent. It’s probably more quantitatively driven, more numerate and more dictated on getting right returns than the traditional capital is.”
It’s not all intelligent though, as nothing ever is, and O’Kane does admit that some of the new capital may be naive about the chances of facing losses.
He continued; “Soon there will be another major loss, some of the naive capital will be destroyed, some people would make mistake, we’ll find out the mistake they’ve made and they’ll be cutting back or eliminating it from business.”
When that happens, O’Kane notes, the rest of the market will be looking at property catastrophe reinsurance again as a new opportunity, so Aspen’s job is to anticipate the market and be ready to take advantage of opportunities like that.
Aspen has so far raised around $100m of capital from third-parties which it is managing within its alternative reinsurance capital management and insurance-linked securities (ILS) focused unit Aspen Capital Markets. O’Kane said he expects to see this grow significantly over the coming years and writing risk using third-party capital is definitely a part of Aspen’s future business plan.
In peak zone catastrophe reinsurance and for big buyers of reinsurance protection, the new reinsurance capital is here to stay, according to O’Kane.
He explained; “My view is that the new capital, or much of the new capital is very sophisticated, it’s long-term, it’s cautious and sensible people and I think it’s profound in terms of change.”
It’s not for everyone though, O’Kane commented; “I don’t believe that’s simply going to replace traditional capital and traditional ways of transferring risk. I think the new capital finds peak zone cat the most attractive thing to do.”
For smaller insurers and those in emerging markets or lacking in peak zone risk the relationship built with a traditional reinsurer will remain important, said O’Kane. Here he sees the opportunity for the traditional reinsurance balance sheet at Aspen, in building and maintaining relationships with those preferring the backing of a traditional, rated reinsurance carrier.
Aspen’s future appears to be firmly in a diversified strategy of insurance and reinsurance, using both traditional and alternative capital sources. It will be interesting to see how this affects the firm’s profitability over a number of years and whether it continues to use this ‘intelligent capital’.
You can read the full transcript from Aspen’s presentation at the conference via Seeking Alpha here.