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September 2012 Bermuda Re/insurance
traditional products, cedants will look at pricing closely” and it would seem that when ILS products can compete on price and offering, they will provide an attractive alternative to more traditional forms of reinsurance, but not necessarily a replacement.
Better in than out
The question then becomes: will the dynamic erode the position of traditional reinsurers? David and Schultz were optimistic about the potential for a cooperative evolution. “It will be a happy partnership,” said David, “one characterised by both competition and evolution.” He said that competition would evidently form part of the dynamic as cedants sought the best price for their coverage, but added that ILS products fit with reinsurers’ “need to diversify”, while providing them with opportunities for involvement. Schultz said that Aon Benfield views the relationship as complementary, with the broker appreciating the ability to discuss the “whole spectrum of capacity with clients”. He added that the ILS market has generated efficiencies associated with multiple markets, further strengthening the wider industry.
Kean Driscoll, CEO of Validus Re—which has been an active
participant in the ILS space for some years—said that while in “some instances Validus Re sees third party capital competing directly with its traditional offering, it also presents the opportunity to bring solutions to the marketplace in times of dislocation, or in areas where Validus Re does not have a huge net appetite”. He said that the company’s approach was a pragmatic one—“if capital needs to come into the marketplace, we need to find a way to capitalise on that, or else find a way to effectively compete with alternative forms”.
Validus Re has taken a pro-active approach to the ILS segments, sponsoring and managing sidecar capacity since 2006. The company’s current managed vehicle lineup includes a series of AlphaCat Re entities which write collateralised reinsurance and PAC Re—a Class 4 joint venture reinsurer established in 2012 with hedge fund Paulson & Co to offer more traditional, rated reinsurance— extending further capacity in the ILS space. Driscoll said that Validus Re’s position in the ILS space “has evolved across a spectrum of products—not only do we offer traditional managed funds, akin to what independent third party managers do, but we have also managed multiple sidecars from our earliest days”.
He said that Validus Re’s approach has differed from that of many reinsurers, with the firm choosing to “align AlphaCat and its other ILS offering directly with Validus Re”. Driscoll said that such an approach enables Validus Re to apply its world-class human capital and analytics to understanding the nuances of ILS products and perils, as well as build on those close relationship it enjoys with insurers and the capital markets. “Thanks to our positioning, we are able to tell investors: you don’t have to chase that narrow market of single-shot business. We enjoy relationships across the
breadth of the market to source potential ILS opportunities.” Such an approach enables Validus Re to extend reinsurance solutions to insurers and the capital markets across the full spectrum of products, creating a compelling case to potential cedants and investors. Validus Re’s approach to ILS—one characterised by a positive, collaborative approach—may not be the most common form taken by the market, but indications are that others will follow in its wake, leveraging traditional reinsurance capabilities in pursuit of rising levels of ILS business.
Wightman predicted that the industry would see more traditional
players “establishing complementary businesses that under the umbrella of their overall group will provide ILS as an alternative to traditional reinsurance in the more commoditised or efficient areas of the property catastrophe marketplace”. This would play well with the rating agencies and asset managers interested in the space as they look to the convergence capabilities of reinsurance firms. Wightman added that he also expects to see more alternative players such as Nephila and CatCo enter the market, offering specialised ILS capacity. Wightman did however indicate that there had been a lot of discussion regarding sidecars acting as direct competition to traditional reinsurance and impeding the 5 to 10 percent rate increases many had sought at the last renewals. “The word cannibalised has been used an awful lot,” said Wightman, but he argued that the fee dynamic associated with these
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