September 2012 Bermuda Re/insurance
19
M
any in the re/insurance industry are talking about an
evolution in the sector as an increasing level of business—particularly in the property cat space—is being underwritten by alternative forms of capital. Collateralised re/insurers, insurance-linked securities (ILS) and sidecars are seizing upon perceived opportunities in the market, even as the soft cycle persists. It seems likely that these new plays will affect pricing and serve to mute any possible turn, but there is a grudging acceptance among reinsurers that they are now a part of the landscape.
‘If you can’t beat them, join them’ would sum up the attitude of some players, with more and more traditional reinsurers deploying portable forms of capital, even though the industry—in 2012 at least— faced no specifi c market dislocations. Bermuda Re talked with three members of its editorial board about the rise of portable capital and asked what is driving interest, whether it will be sustained beyond the current fi nancial crisis and what effect it will inevitably have on more traditional players.
Alternative plays in the reinsurance area have been around for some time—with ILS issuance beginning to make waves back in 1996 (see table overleaf)—but they seem to have gained traction—and headlines—in recent months. A number of factors are playing their part. One of the key drivers has been the doldrums that the wider capital markets have found themselves in following the fi nancial collapse of 2008. In search of returns, many investors have turned to reinsurance and the potential of quick forays into the space.
Paul Markey, chairman of Aon Benfi eld, spoke of rising investor interest in the collateralised space, indicating that “there is continued interest from investors to enter—particularly on the cat-side of the business—because the returns are interesting, and, in the case of US risks, they are well understood”. Markey said that a lot of collateralised cat business now falls into the alternative investment strategies of an increasing number of institutional investors. Hedge funds have led the charge, but increasingly other institutional funds are getting in on the act, regarding investment in reinsurance as a diversifi cation tool, he said.
Markey added that such forms of capital “dovetail well with the pure ILS business”, providing clients with further options to hedge their risk. He said that investors were pleased to have the choice of products offered by the alternative market, from industry loss warranties to parametric triggers and indemnity deals. He added that with the help of models, ILS-type products are becoming increasingly understandable to the wider investment community, with portable capital representing a “potentially neat addition to their wider portfolio”.
Mark Watson, president and CEO of Argo Group spoke in a similar vein, indicating that the supply side has been driven by rising
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