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Original Risk: A Society for Change Agents

Proactive innovation through ILS is driving change in reinsurance


One of the major trends likely to influence the reinsurance market over the next five to ten years is proactive innovation through insurance-linked securities (ILS), according to reinsurance leaders speaking at a conference in Bermuda over the last two days.

With growth of traditional reinsurance markets seemingly limited and a number of disruptive threats threatening the status quo, reinsurance leaders on a panel at the PwC and Standard & Poor’s Ratings Services 2013 Bermuda (Re)insurance Conference said that there is a need to keep up with new trends and initiatives in order to stay competitive.

Change and innovation was a feature of the panel, with PwC Bermuda’s Managing Director of Insurance Matthew Britten suggesting that the market forces which are driving innovation and change may in the future be looked back on as a key period in the history of the reinsurance market.

Britten said; “There seemed to be broad agreement that while this particular point in the (re)insurance market’s history may be remembered for the influx of alternative capital into the market, there are a number of other major forces that will influence the shape and future landscape, including, but not limited to: Customers expectations and distribution; Government intervention and regulation; Access to emerging markets; Advancement of technology and data analytics.”

In order to be successful, Britten said that it is vital to keep up with disruptive trends which are driving change in the market. He commented; “The key to success is going to be keeping one step ahead of the market by sustaining an edge in analytics, innovation and the development of new markets and the coverage of new risk types.”

David Law, PwC Global Insurance Leader, agreed, suggesting that the time has come for ILS to look seriously at how it can move beyond property catastrophe reinsurance risks, something that new advances in data and technology will assist.

Law commented; “With more than $3 billion of new capacity coming to the ILS market in the first half of 2013, the growth is creating an opportunity for traditional reinsurers and for the new ILS funds to participate in new markets and risks. To obtain growth and achieve the desired yields, investors will have to embrace new types of risks where there is less data and advanced modelling available.”

Panelists, highlighted at the event, insurance-linked securities (ILS) as a key innovation which is driving change across the reinsurance market. The change ILS is bringing is seen as more proactive, than reactive, unlike many other major changes in the markets history.

“What’s interesting is that previous game-changing points in the market have been the result of events,” commented Jeff Sangster, Executive Vice President and Chief Financial Officer, Validus Holdings, “Whereas this is more of an organic change in the market.”

“In a lot of ways it is probably one of the most innovative – it is not reactionary,” Mr Sangster continued. “It is almost more proactive change in the market to more interesting products that suit the buyers’ needs more so than the traditional market.”

The panel also discussed regulation and the need for it to be strong but sufficiently flexible and targeted to enable the ILS market to grow. With Bermuda a key domicile in the reinsurance market, the regulatory environment has been shaped to support innovations such as ILS.

Andre Perez, Chief Executive Officer and Founder, Horseshoe Group, stated; “The beauty of Bermuda is we’ve always fostered innovation and always made innovation possible and simpler, and that I think is going to continue being one of our main strengths here.”

ILS and the influx of third-party capital into the catastrophe reinsurance space has driven change, as participants on an earlier panel at the event explained.

Bryon G. Ehrhart, Chief Executive Officer at Aon Benfield Americas, said; “It has brought more choice to clients. There is no question that the cost of bearing the most intolerable catastrophe risk has gone down.”

Meanwhile Kean Driscoll, Chief Executive Officer, Validus Reinsurance Ltd, commented on the benefits of ILS; “From our perspective it allows us to bring additional solutions to our customer base.” However, he also highlighted the importance of reinsurance and its use as complement to ILS saying that the traditional reinsurance product was ultimately more compelling to the vast majority of the company’s clients.

Read this previous article:

Insurance-linked securities market calling for innovators: PwC

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