Traditional reinsurance firms continue to launch alternative capital management platforms, as one strategy to offset the challenges of a soft reinsurance market but also as a way to “maintain presence and relevance,” according to broker Willis Re.
Writing in its recent market report, Willis Re, the reinsurance broking arm of Willis Towers Watson, explains that reinsurers alternative capital and ILS management ambitions are more than just a reactive response to market conditions, rather they are becoming key to remaining an important player in the marketplace.
The broker highlights a “continued need for scale and breadth of service offering” in the current, challenging reinsurance market environment and expects that we will increasingly see a “divergence in results” as certain reinsurers that have achieved scale or diversity are able to outperform smaller players.
This all comes down to the question of either remaining relevant to cedents and brokers, or being able to offer something different or attractive that enables reinsurers to maintain their position in the market better, against strong competition and under pricing pressure.
“Given the current climate, the broadening of reinsurer business models is proving a successful strategy for many and increasing relevance to clients, despite the impact on expense ratios,” John Cavanagh, Global CEO of Willis Re explained.
One way that reinsurers have been achieving this is through the launch, or acquisition, of alternative capital platforms, reinsurance sidecar vehicles or full-blown insurance-linked securities (ILS) fund managers.
Larger reinsurers, or those with something different to offer, have been better able to “defend renewals from a position of strength and depth of relationship compared to a number of their smaller peers which have been under greater pressure to diversify and compete more aggressively on price,” Willis Re’s report explains.
Adding alternative capital abilities, which if managed correctly results in a new, lower-cost, balance-sheet becoming available for underwriting, broadening the offering, enhancing competitiveness and efficiency, can be one way to help maintain presence and relevance in the market.
“A number of reinsurers have been able to maintain presence and relevance through new or alternative platforms. This included sidecars or ILS funds on whose behalf they underwrite,” Willis Re states.
Along with the push towards alternative platforms, which is continuing and Artemis is aware of a number of re/insurers which are actively working on plans to launch their own alternative capital platforms later in 2016, or early 2017.
At the same time a constant question we hear, is which ILS manager might be up for sale. There are a number of re/insurers which are definitely on the hunt for an easier way to get into alternative capital management, making acquisitions increasingly possible. Of course valuing an ILS business is sometimes not an easy task, so hurdles to acquisitions remain.
But the fact remains, that gaining access to a more efficient, third-party capital balance-sheet, be that through a sidecar, joint-venture, total-return reinsurance vehicle, ILS fund management operations, or some alternative play on the ILS strategy, is good for re/insurers and can help them to maintain presence and increase their market relevance.
Willis Re notes in the report that “the boundaries between alternative and traditional reinsurance continue to blur.”
However, despite this blurring of lines it seems the traditional reinsurers appreciate the efficiency of third-party capital vehicles and structures, suggesting we should expect this source of risk capital to continue to be embraced by them.
We still need to see how these developments pan out for all traditional re/insurers that embrace ILS and third-party capital. Not everyone can be winners and some will find that their push into managing third-party capital may only serve to cannibalise their existing businesses, while bringing lower revenues compared to underwriting on their own balance sheets.
It is, to a degree, a delicate balancing act, bringing new balance-sheets into the capital structure, which are funded by third-party investors and potentially lower-cost and more efficient than the shareholder backed one.
Identifying how to utilise third-party capital versus shareholder capital, whether a sufficient fee and profit can be generated on the third-party structures, or whether profit is in fact just being shifted away from shareholders, are key questions that need to be answered for any traditional company either setting up their own ILS unit, or looking to acquire one.
You can download the full report in PDF format here.
– Realistic reinsurance RoE’s down to 3.4%, expenses up: Willis Re.
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