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Sidecar helps drive more competitive reinsurance pricing: Gartzke, Liberty Mutual


Accessing the capital markets for reinsurance capacity through its quota share sidecar helps Liberty Mutual drive more competitive pricing and provides a source of capacity for growing businesses, according to Arno Gartzke.

liberty-mutual-insurance-logoThe Vice President, Director of Strategic Development and Global Reinsurance at primary insurance giant Liberty Mutual was discussing the firms use of its collateralized reinsurance sidecar during a panel session at the SIFMA IRLS 2019 conference in Miami last week.

Gartzke highlighted the main attractions for the insurer, mentioning key motivations that should encourage other insurers to tap into the capital markets appetite for reinsurance risk.

The company completed its third reinsurance sidecar transaction through the Limestone Re Ltd. vehicle at the January renewals, placing a $150 million arrangement with ILS investors and ILS funds.

Discussing the reasons for tapping ILS appetite, Gartzke said, “We’ve done a number of sidecars in the last couple of years and if I was to classify the main motivations it falls into two broad categories.

“The first would be to develop a source of capacity for our corporate property cat placement. As one of the larger primary insurers in the US we place a significant amount of limit every year in our corporate cat tower and having another source of capacity we believe over the longer-term will help us drive the most competitive pricing.”

In this way Liberty Mutual is using its direct access to ILS capacity through Limestone Re in the same way some insurers have used catastrophe bonds before.

By placing a capital markets ILS arrangement alongside its traditional catastrophe reinsurance tower the insurer can test risk appetite and drive pricing as much as possible, by creating competition between the two sides of the market.

If pricing is particularly keen on one side or the other, this feedback can help to influence the other side, hence the sidecar quota shares are a useful way to benchmark capital markets appetite for reinsurance against traditional and vice versa.

Gartzke said this helps to provide well-priced capacity to drive further growth.

Gartzke said ILS transactions, “Help us access capital to grow businesses we want to grow, primarily through the quota share vehicles that we’re using.

“We find that it’s a good way to access that capital and fund growth in businesses that might have some unique capital constraints.”

The second motivating factor is to ensure Liberty Mutual has broad access to capacity from all sources.

“The other thing that we’re doing is having an eye to the future. You know, what’s the market going to be like in five or ten years?

“We can all speculate about that, but we can probably say it’s going to be bigger and there will be a wider array of risks that will be placed into the market over the longer term.

“We feel as a very broad and diversified insurer that any additional development in terms of appetite for risk could potentially be an opportunity for us.”

Here Gartzke is perhaps suggesting that Liberty Mutual could look to expand the kind of risks it places into ILS investors and funds in the future, if the market has the appetite.

By being in the market regularly, Liberty Mutual can ensure it has robust connections to the most innovative ILS funds and investors, ensuring it is well placed to expand its activity should it choose.

He explained, “Developing relationships with the key investors that are taking on the risk that we’re ceding into the market, that does take time. If you’re looking at the more complex risks, getting people comfortable with that and seeing how they behave.

“I think the benefit of ceding portfolios and going through multiple transactions gives a foundation we can build off into the future.”

These motivating factors are being explored by a growing range of large primary insurers and as the capital markets becomes an increasingly stable source of reinsurance capacity the use of its appetite for risk will only grow.

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