Reinsurance companies that are actively managing third-party capital in insurance-linked securities (ILS) vehicles are some of the best positioned to take advantage of the current favourable underwriting conditions, according to Moody’s Insurance Credit Analyst, Helena Kingsley-Tomkins.
Speaking during a briefing this morning, Moody’s Investors Service VP and Insurance Credit Analyst, Helena Kingsley-Tomkins, explained that the role of alternative capital in reinsurance has evolved, becoming an integral part of the industries risk management, but also a key profit driver and lever for managing market conditions.
Previously, as the insurance-linked securities (ILS) grew rapidly and alternative capital in reinsurance expanded quickly, the main effect was one of competition, which helped to drive a “severe impact on profit margins,” Kingsley-Tomkins said today.
But now, “The role of alternative capital in the reinsurance market has definitely evolved, it’s now firmly embedded as a risk management tool for the sector,” she continued.
Going on to say that, beyond risk management and retrocession, alternative capital and ILS is also “an opportunity for the market.”
“While it is still a form of competition, we see that more traditional reinsurers are managing their own ILS funds and third-party platforms and we do think that it brings a number of benefits,” she said.
One of the important benefits is as a type of leverage and lever for their own capital, enabling reinsurance firms to be more expansive, particularly in catastrophe risks.
“It allows reinsurers to opportunistically expand and contract their capacity,” Kingsley-Tomkins said. “It allows them to grow their footprint without significantly expanding their risk exposures at the same time, and we think this sort of maximises risk adjusted returns, because they are able to earn a pretty decent fee margin on the funds that they operate.”
Which leads Moody’s to consider alternative capital and ILS operations very favourably for major reinsurers.
Kingsley-Tomkins explained that, “I think in our view today, reinsurers with well-established third-party capital funds are some of the best positioned to take advantage of the more favourable operating environment.
“In particular, because the recent losses and expected catastrophe trends have actually increased the alternative capital market’s focus on underwriting discipline.”