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Original Risk: A Society for Change Agents

Potential for post-event capital lock-up as ILS expands: Guy Carpenter


The need for reinsurance solutions for managing capital and earnings is as relevant as ever in today’s rapidly changing industry, but the increased use of alternative capital solutions has resulted in the potential for capital lock-up, according to Guy Carpenter’s James Nash and Julia Chu.

“In today’s world of unprecedented rapid change and disruption, the reinsurance solution for managing capital and earnings is as relevant as it has ever been,” says Nash, President, International, at reinsurance broker Guy Carpenter.

However, Nash continues to explain that the use of alternative reinsurance capital solutions, an area of the risk transfer market that continues to expand (reaching almost $90 billion of overall dedicated reinsurance capital, according to Aon Benfield), has created the potential for “a capital ‘lock-up’ in segments of the market and the industry continues to seek solutions for ensuring liquidity.”

Artemis has discussed the potential for capital lock-up in the ILS sector post-event previously, and in light of recent event such as Harvey and the potentially huge impact of hurricane Irma, it’s not too surprising that Nash highlights the risk of capital lock-up.

At the same time, a number of insurance-linked securities (ILS) funds already have established post-event funds, and it’s possible that other fund managers are preparing, or have already prepared a post-event fund for their third-party capital investors to take advantage of any pricing movements.

Post-event funds enable investors to quickly capitalise on any pricing uptick in the reinsurance sector in the event of the removal of a substantial amount of capital, something that is needed to turn the marketplace from its soft cycle, and which some in the space feel might well happen should hurricane Irma make a direct Miami landfall as a strong storm.

While it’s believed fairly broadly across the insurance and reinsurance industry that the volume of alternative capital both in the market and sat on the sidelines waiting to enter is likely to flatten any post-event price increases, a post-event fund enables investors take advantage of any opportunities that do occur.

Moving away from the alternative space, Nash highlights the ability of reinsurance capital to achieve stability and growth for cedents, something that came to light after the 2008 financial crisis, says Nash.

In the current market landscape, broker Guy Carpenter expects to see growth in reinsurance purchasing across all forms, highlighting a “vibrant” marketplace where buyers are eager to make the most of available solutions, both traditional and alternative.

Chu, adds; “Clients, from global insurance giants to specialty niche Lloyd’s underwriters, have unique risk profiles. Solutions for earnings protection are not ‘one-size fits all.’ Some may seek protection for one large severity event and others may seek protection for frequency of occurrences on an aggregation point.

“Regardless of where this risk comes from or how an optimal solution is designed for them, the universal goals are more consistent quarterly/annual earnings that many investors prefer and that, in turn, allow those companies to attract higher price multiples.

“As clients focus more on protection of earnings and the value that stability brings, they have shifted towards more expansive covers and the availability of a broader array of reinsurance solutions on offer.”

Nash, commented; “As reinsurers seek to de-commoditise their offering we have seen an increase in product complexity and a willingness to offer innovative and customised solutions to help meet their clients’ goals and growth ambitions. Innovations may include special coverage features applying to specific industries or risks unique to specific clients.”

“The decade beginning in 2005 saw society change at a rapid pace. However, the insurance industry, faced with a series of regulatory challenges in addition to the global financial crisis, was slow to innovate. It is now playing catch up, creating an environment of opportunity for insurers to innovate product and business models.”

Looking to the January 1st, 2018 renewals season, Guy Carpenter highlights a reinsurance market with an abundance of capital ready to deploy, as well as a growing number of structures to utilize as an opportunity to “de-commoditise its offering.”

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