Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Vario non-cat ILS partnership a key innovation at Guy Carpenter


Guy Carpenter firmly threw its hat into the insurance-linked strategies ring this week, saying that the partnership announced last week between the reinsurance broker and Vario Partners, forming a non-catastrophe risk ILS vehicle, is a key innovation and initiative for the broker.

Vario Global Capital Ltd., the name of the joint-venture between specialist insurance analysis and modelling firm Vario Partners LLP and Guy Carpenter, will target the non-catastrophe lines of reinsurance business and seek to build portfolios that can be backed by capital market or ILS investor funding.

As such it’s an intriguing venture, which in a market that is dominated by catastrophe exposure, could become a very important venture for a broker like Guy Carpenter, as the firm seeks to support Vario Partners in building a market-leading ILS venture.

Demonstrating just how big a deal Guy Carpenter feel the venture could be, speaking at the brokers Monte Carlo Rendez-vous press briefing this week, Nick Frankland CEO of EMEA stated; “In time we see Vario becoming the industry’s leading fund manager in this space, as Nephila achieved in the cat sector.”

That’s a very big statement, which suggests that Vario’s “proprietary model for transacting non-cat risks into the ILS market” is destined to be a big deal.

It’s unlikely that Guy Carpenter would throw its weight behind such an ILS venture, unless the broker saw it as profitable and something that will benefit its global client base.

“One of the principal benefits of such an approach will be to deliver a cheaper cost-of-capital to clients, which plays to a changing reinsurance environment, where the previous currency of risk management is being replaced by a wider conversation around capital optimisation,” Frankland explained.

Continuing; “As such transactions in this space will quickly become a complementary tool in clients wider economic management, like cat bonds before them. But unlike them, we will also have the potential to transform a significant part of the industry’s capital construction.”

So it’s clear that Guy Carpenter sees a huge potential for the Vario partnership and for non-catastrophe risk ILS in general.

The brokers comments during the press briefing hinted at an even more capital source agnostic approach to broking and client advocacy than we have perhaps heard before from Guy Carpenter. The comments on the potential for Vario Global Capital underline this.

Frankland said that it is clear that innovation is needed in the current marketplace if Guy Carpenter is to achieve more. He called the Vario partnership “groundbreaking” and likely to provide the broker with the impetus to drive the business forwards.

“Above all we need to predict and provide for our clients needs,” Frankland continued. “The imperative to optimise the cost of capital and its allocation, likely to reduce traditional reinsurance spend over time, but provide significant opportunities for alternative approaches to risk transfer. We hope to be leading the way with initiatives like the Vario joint-venture.”

During questions Frankland explained that Guy Carpenters role in the Vario partnership will be as an equal partner, bringing its expertise as a broker and role as client advocate, providing client services and access to risk transfer to clients as it does traditionally and alternatively today with all of its clients.

As Vario Global Capital grows and moves towards the ILS fund model, that it aspires to be, it is possible that Guy Carpenter may find its stake diluted or that it even steps out of the venture entirely in future, as Vario becomes a source of capacity rather than just a partnership to match non-cat risks with capital market funding.

Guy Carpenter is clearly bullish about the potential for ILS to expand into these non-catastrophe lines of business, which is positive for the entire ILS market and those investors looking to enter it. The potential for a new avenue as core to reinsurance as catastrophe bonds to open up, could be something very interesting indeed.

Read all of our Monte Carlo Rendez-vous 2015 coverage here.

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