The reinsurance industry has been characterised by excess capital and capacity, but the increasing range of potential capital sources has been influencing reinsurance buying dynamics, meaning reinsurers need to be able to access the most effective capital for their clients.
“The capital landscape is ever-changing,” Nick Frankland, CEO of EMEA Operations at reinsurance broker Guy Carpenter explained in a briefing released in time for the 2016 Monte Carlo Rendez-vous, “with new forms and sources of capital rapidly expanding the range of options available to the buyer”
The buyers market in reinsurance now extends beyond price alone, with different capital sources offering different structural product design, terms, durations, levels of collateralisation and efficiency.
“This very much places the onus on the reinsurer to ensure that it is offering the most effective form of capital at the lowest possible cost,” Frankland stated.
This is a key point and fits nicely with our thesis that reinsurers are increasingly going to have to become capital agnostic specialists at originating, analysing, pricing and underwriting risk, using the most appropriate balance-sheet capital available to them, be that their own equity-backed or third-party capital markets sourced.
And this increasing need for capital to be appropriately selected is not just good for the buyers and the capital providers, it’s also good for the brokers, Frankland continues.
“Such capital diversity also elevates the position of the broker,” he said. “At Guy Carpenter, we fully recognize that our role is central to matching buyers and sellers through the most efficient channel possible.
“We are in the strongest position to provide access to all forms of capital and so secure the more beneficial rates and terms and conditions.”
What is interesting here is how the future dynamic of a capital agnostic reinsurance sector plays out between brokers and large reinsurers, with both positioning themselves as the capital advisor as well.
Could the next phase of competition be between the reinsurers and brokers, as roles converge as capital providers become more numerous? If reinsurers need to be able to select the right capital, including third-party backed owned ILS funds, sidecars and other vehicles, brokers can offer that service too using the ILS market and its managers as well.
If the reinsurance business model does indeed adjust towards a capital agnostic one, where pricing, analysis and underwriting is more important than ensuring the risk sits on your own balance-sheet, perhaps the brokers can offer that service too using third-party ILS fund manager backed capital?
The question then would come down to efficiency. Whether it is more efficient for a cedent to leverage a reinsurer or a broker, to access the right one of the multiple forms of capital available?
That does suggest competition between reinsurers and brokers could grow, as has already been seen thanks to broker facilities and follow-form arrangements.
The industry continued to jostle over shrinking demand though, despite the low rate environment.
“Given where rates currently are, you would expect insurers to take full advantage,” Frankland said. “However, we are dealing with conflicting forces and while pricing is highly attractive at present, insurers are facing difficult market conditions and chronically weak investment returns, putting immense pressure on earnings.”
This is going to put a focus on service quality, we believe, as the providers of the best analytics, pricing, market data, intelligence, underwriting, structuring and packaging of risk, along with the broadest and most agnostic access to efficient sources of capital, could emerge the preferential company to work with.