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Original Risk: A Society for Change Agents

Opportunity for reinsurers to learn from ILS: Aon Benfield CEO


Dominic Christian, co-CEO and CEO of International at reinsurance broker Aon Benfield, made a number of interesting comments at the brokers pre-Monte Carlo Rendezvous press briefing on Monday. One point Christian made was that traditional reinsurers need to look to the ILS market for inspiration.

The Aon Benfield chief said that the reinsurance market is beginning to broaden coverage options available to cedents, which has been considered a response to the increasing influence of insurance-linked securities, third-party capital and alternative reinsurance structures.

During his speech at the event, Christian said that the broker has seen a new flexibility in reinsurers offerings and a broadening of available coverage options, but he asked how far this would go, implying that more work in this area is required. The ILS and collateralized reinsurance markets are leading the way in adding flexibility to coverage and Christian said that reinsurers can learn from this, starting with multi-year products.

Christian said that traditional reinsurers need to offer multi-year coverage options in reinsurance policies, taking  the lead from ILS and collateralized. He said; “The traditional market is supposed to be the market of longevity, continuity and the future and yet it tends to price itself only for annual policies.”

Christian suggested that traditional reinsurers need to begin to think about pricing reinsurance contracts in terms of three-year protections, brining its offering more into line with ILS and catastrophe bonds.

This is perhaps a bit of a warning disguised as advice for reinsurers. With the most important reinsurance renewals of the year just four months away in January, it currently looks like ILS and collateralized markets will take an even bigger chunk of the renewal pie than they did at the recent mid-year renewals.

Christian’s comments that reinsurance firms need to consider coming into line with ILS and collateralized in terms of flexibility and coverage options is timely, given the need for reinsurers to begin discussing the available options with cedents over the coming weeks.

He also suggested that traditional reinsurers take note of the way the ILS market deals with issues such as the ‘hours clause’, a clause particularly used with catastrophe reinsurance contracts which can specify the number of hours following the occurrence of a catastrophe that claims will qualify as part of a single event.

In ILS, particularly catastrophe bonds, there are often more flexible hours clauses, sometimes longer or sometimes when structured on an industry loss basis down to the reporting agencies definition of an event. Traditional reinsurance is often more restrictive in terms of hours and Christian highlighted this as another opportunity to rethink their offering and bring it more into line with ILS covers.

The hours clause is also considered to bring basis risk into traditional reinsurance and there have been cases where an event has been defined as two smaller catastrophes, due to the contractual hours clause, meaning that the cedent could not claim as neither event reached the policy excess level. Perhaps a rethinking of the way events and occurrences are defined will assist in making this more appropriate for cedents, although this will often need to be on a case by case basis.

“Products and coverage provided in the traditional market could be widened by thinking through the coverage provided in ILS or collateralised markets,” commented Christian. Christian also hinted at the need for multi-line deals, again to compete with (and learn from) ILS offerings.

The discussion at the briefing on the 2nd September also highlighted some new opportunities that Aon Benfield believes are available to reinsurers. Christian said that the broker has identified at least $2 billion of new reinsurance premiums from government-run catastrophe facilities.

He suggested that these government backed catastrophe insurance facilities are not taking as much reinsurance as they are likely to require in years to come, as rules force them to take more cover. He said that they might need to double their reinsurance premiums spent in years to come, which would add at least $2 billion to the cat reinsurance market.

Christian said that government-run catastrophe schemes may well be the main growth opportunity for global reinsurers in years to come, but noted that these will be particularly attractive for alternative reinsurance capital and ILS as well.

Hence the need for reinsurers to up their game and come to the next renewals with a new and more flexible range of product offerings, or, at the least, a willingness to discuss flexibility and consider fighting harder for business against alternative capital by matching flexibility within ILS and collateralized reinsurance covers.

Yesterday we published a long article on Aon Benfield’s latest study on global reinsurer capital. In the report the broker said that in the future it expects less reinsurance will be written against rated reinsurer balance sheets and more on, what it termed, ‘satellite’ structures backed by third-party capital.

That is the future dynamic that many in the market are expecting and the onus really is on reinsurers to adapt to this new reality of alternative capital structures being the home for large swathes of reinsurance programs. We strongly believe that how reinsurers adapt to this new reality is going to be the key structural issue we discuss in reinsurance for some years to come

The message that Christian delivered suggests that the reinsurance broker is getting requests from traditional cedents to facilitate a broader range of coverage options and more flexibility within reinsurance programs. If reinsurers fail to listen and adapt to the new offerings from alternative reinsurance capital sources they may find themselves losing even more of the attractive layers of reinsurance programs at renewals to come.

For more of reinsurance broker Aon Benfield’s thoughts on alternative reinsurance capital, ILS and the capital markets growing influence in reinsurance read our recent articles:

Capital markets investors boost global reinsurer capital to $510 billion

Strong capital inflows bring ILS & cat bond market to new high: Aon Benfield

More reading:

There are so many reports and commentaries coming out on alternative reinsurance capital and ILS in the run up to the Monte Carlo Rendezvous event that we felt it worth highlighting some other reading on the topic, all from the last week or so, which you can find below (most recent first):

Demand for alternative reinsurance instruments and ILS to continue: Fitch

Alternative capital the biggest challenge for traditional reinsurers: Moody’s

Lloyd’s Nelson warns on ‘systemic’ risk of alternative reinsurance capital

Broker facilities an opportunity for third-party capital to expand reach?

Opportunity for reinsurers to learn from ILS: Aon Benfield CEO

Capital markets investors boost global reinsurer capital to $510 billion (including a useful list of links to many alternative reinsurance capital initiatives that we have covered previously)

Strong capital inflows bring ILS & cat bond market to new high: Aon Benfield

Alternative capital a disruptive force in reinsurance: Goldman Sachs

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