Delegates at an event held in Bermuda recently suggested that the traditional catastrophe reinsurance model may already be dying, as investors providing alternative reinsurance capital move in with more efficient structures and lower-cost capital.
At the Insurance Day Summit held in Bermuda recently, Andre Perez, Founder of the Horseshoe Group specialist insurance-linked securities servicing and management firm, said what many in the traditional reinsurance market fear to be true, that the death of some catastrophe reinsurers is already assured.
Mr. Perez, quoted in this Royal Gazette article, commented during a panel on the evolving role of reinsurers in the insurance-linked securities space; “Maybe not so much the large, established multi-line reinsurers, but the traditional catastrophe reinsurance model is dying already.”
Perez continued, saying that some reinsurers are destined to become service providers to pools of third-party reinsurance capital provided by investors; “It will have to die because what ILS has already proven, from my perspective, is that reinsurers will eventually become glorified MGUs (Managing General Underwriters).”
He acknowledged that reinsurance companies have significant expertise which can be put to good use. However the future for this expertise may be more in facilitating the matching of risk with capital, rather than underwriting against a company balance-sheet.
Perez explained; “You have the expertise, the business access and the underwriting excellence. This is true. But now you have different forms of capital with a different risk appetite and different risk profiles. You are going to become in the future a servicer to risk capital — no different than an ILS investment manager or a bond fund, an equity fund and other funds.”
“Why couldn’t we change that model, servicing different risk appetites, as opposed to being stuck with permanent capital and being a slave to your shareholders, and not actively manage your reinsurance portfolio. At the end of the day, insurance contracts are just like investment instruments where the bet is on underwriting performance,” Perez continued.
Looking ahead, Perez said that he expects to see a very different reinsurance market landscape; “But in 20 years’ time, I think we are going to see a very different landscape. And it is getting worse because it started with property cat (reinsurance), but we are starting to see other lines ‘invaded’, including terrorism and crop.”
Perez said what many currently fear. That the future for some mid-sized catastrophe focused reinsurance firms is far from secure. Some reinsurers are already heading in the direction of becoming service providers to external capital, managing ILS capital from investors to give them a lower-cost source and to earn them fees, others continue to compete heavily and fight hard to remain relevant.
For the moment they still have shareholders but, as we’ve written before here and here, should the share repurchase trend continue as a way to manage excess capital and lack of deployment opportunities, some smaller reinsurers may find themselves naturally morphing into conduits and service providers for risk capital.
The fact that this risk capital may be provided by capital markets investors with a lower-cost and perhaps better understanding of their return requirements is the key difference to the traditional reinsurance model, which as Perez said may free some reinsurers from the shackles that having shareholders places on them.
Read some of our other articles on the changing reinsurance market: