September 2014 18 Bermuda:Re/insurance+ILS


trend across clients or lines of business. There are some insurers who manage their risk in a more prudent manner and are not simply looking at the savings from buying less reinsurance, but rather are evaluating the risk-adjusted returns and buying more reinsurance. Endurance is in that camp. We have bought more reinsurance and retrocessional coverage over the past year because we view this capacity as an effective tool to better manage our capital.


Retrocession capacity in particular has been plentiful from both


traditional reinsurers and capital market players and we have been able to utilise it to reduce the volatility of our portfolio. In summary, we believe that by building strong relationships with key clients across a multi-line portfolio, we are able to optimise our position and generate more business, even while broader demand for reinsurance is decreasing.


WILKEN: As our customers continue to pursue strategies to optimise returns in an ever more competitive environment attention naturally focuses on a strategy that reduces reinsurance spend. Larger clients with sophisticated capital assessment tools are able to better manage their ‘modelled hypothetical returns’ and this has catalysed a desire retain more risk. It would appear that this is a fact of life. However a number of observations could mitigate this trend:


1.


Access to alternative forms of capital with a lower return requirement could result in the transfer of risk being more cost- effective than even the larger clients can match.


2. Emerging risks that are not as eminently ‘modellable’ as the


current natural catastrophe risks appear to be can result in clients not being willing to accept the same degree of risk as they would have done initially. For example, cyber risk exposure could unlock demand from clients in a way not previously catered for.


3. Over-reliance on hypothetical mathematical models. As the industry drives towards more standardised models for risk assessment and capital optimisation the likelihood of the industry becoming susceptible to systemic risk increases. The absence of significantly large US catastrophes for nearly a decade has not tested many of the hypothetical mathematical constructs. It remains to be seen whether post-event all the strategies that have demanded a greater retention of risk in the pursuit of marginally improved returns stay the same. There is a distinct possibility that changes in appetite post-event may unlock demand from customers.


“We are well placed to deliver the innovation our clients demand and the returns that ensure we continue to be a long-term player in this industry.” Jeremy Pinchin


PRESSMASTER / SHUTTERSTOCK.COM


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