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Bermuda Re/insurance Roundtables


7


led to the kind of business interruption losses we might have expected in manufacturing locations.


Cooper: In this instance it was financial services versus manufacturing.


The other issue is that it occurred in downtown Manhattan post-9/11, which has some pretty robust contingency plans.


Rentrup: Hurricane Sandy also proved a great surprise to the marine market. Losses resulting out of this premium-wise relatively small market are estimated to be around $2.5 billion.


Driscoll: Much like flood, there are going to be clear winners and losers in that space and there’s likely to be a pretty rude awakening for some. It’s a possibility that it will prove a slight marine retrocessional loss. Marine retrocessional capacity is incredibly scarce right now, and because it’s a small market, losses will have a compound effect.


Few: Sandy is probably the biggest marine loss ever. Previously


it was Piper Alpha at around $2 billion, but this is probably going to reach $3 billion for the industry. It’s cargo, yachts, pleasure craft. Some interesting stories have come out of Sandy regarding wind and flood risk management, such as cargo containers that were stacked horizontally to avoid wind risk, resulting in still greater flood damage. A lot of the containers are being shipped to their final destination and the damage won’t be clear until they’re opened, which is one of the reasons why the marine loss is creeping.


Another Bermuda player has indicated that it intends to establish a fully collateralised reinsurance vehicle. What are people’s appetites like for such forms and how do they see that appetite developing?


Driscoll: We are an active participant in the managed capital space through our Alpha Cat brand, and that involvement can come in a variety of forms—traditional managed funds and sidecars among others. For us there are compelling reasons to participate in that space. First and foremost it allows us to offer more products and solutions to our partners. We offer not only increased capacity, but diversity of credit and, coupled with a consistent approach and a single point of entry, this represents an important differentiator that has received a positive response.


We like the space. It’s clearly a double-edged sword in terms of the amount of capital that’s being drawn into the space and I’m not quite sure how that ultimately plays out, but we see capital come in and behave responsibly and we see capital come in and behave irresponsibly. It’s probably no different than traditional rated reinsurance. But it’s a reality that we’re going to have to deal with—it is probably 15 percent of the total global catastrophe market right now, and certainly a much greater percentage than that in certain segments.


Becker: It’s 60 percent in the retro market. It’s clearly a phenomenon that’s real and here to stay for some time and as a property catastrophe writer you probably are disadvantaging yourself if you don’t find some way to participate.


Cooper: I agree. The one point that Kean brought up that I would debate is that collateralised reinsurance is a supply-driven phenomenon rather than a demand-driven issue. I would argue that the value of a collateralised product low down in the programme is debatable, and when you offset that with the additional costs of administrating a trust and issues such as that, I’m not sure it’s as valuable from a buyer’s perspective as it would be at the top of the programme, where people would really be worried about such risks.


Nevertheless, the capital markets are decidedly interested in the space. As a traditional player you’ve got two choices: you can just ignore it and hope it goes away—which I don’t think is going to happen—or you figure out how to embrace it, because otherwise you run the risk of eating from a much smaller pie in the future.


Few: We’ve been in this space since 2009 through a managed fund


called Iris Re, but the world is changing—the cat world, specifically— and we all need to recognise that it’s probably going to change permanently, rather than in any one cycle-driven type scenario. It is not just due to an extended period of low investment returns that alternative capital is interested in cat. Alternative capital has become comfortable with the fact that this is a non-correlating asset class, buyers are more comfortable with basis risk and there is now a range of products to choose from.


There may be some fall-off in capacity if interest rates rise and alternative asset classes become more attractive, but the point about diversification has been rammed home since 2008 and although there have been a few losses, capital is still available. Companies need to think more about this new, permanent reality. Some of the capital is happy with a lower return, so if that capital is coming to the market looking for a different return profile than we’ve been used to servicing, then obviously we need to consider the competitive implications.


Rentrup: It is capital that is going to stay. Yes, if interest rates rise


maybe there will be less capital available in this segment, but it’s not going to disappear. It is diversification for the capital markets. Currently there is plenty of capacity in the market and as a traditional underwriter you do not really need further additions, but going forward collateral markets and ILS products can also add value. Currently any new capital that enters the industry will arrive via these kinds of instruments. I do not foresee that new capital will come to Bermuda or other jurisdictions by establishing a multi-billion reinsurance operation.


Driscoll: A point to maybe think about is where this capital comes


in, even within the managed space. We all have some interest in the third party space and it’s largely with a closely aligned managed capital strategy, which is atypical with what we’re seeing in the broader space, where there are a lot of independents cropping up. However, what those investors are missing is a true understanding of what it takes to effectively deploy capital. They think it’s plug and play, you license a cat model and you’re good to go. But that is not sustainable, so I expect over the long term that more of the


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