September 2014 Bermuda:Re/insurance+ILS 21


There is also huge potential for an increase in demand from non-


traditional buyers such as Citizens. Floridians are buying a lot more reinsurance these days and there is a tonne of risk out there in the world that isn’t being transferred into the private markets. Presently it is being retained by governments and individuals and as the current pricing dynamic works through the market I can see increased demand permeating through the system as the cost of transferring risk becomes more economically viable.


Do you foresee further permutations in the re/insurer model? What other structures and approaches do you predict in terms of structural and strategic innovation?


WILKEN: We foresee more change and at an increasing pace. Accessing funds beyond the normal sphere of the insurance equity markets will, in our opinion, begin to influence the insurance space in the same way it has impacted the reinsurance space. The trend of using ‘other people’s’ capital as opposed to one’s own capital has created a new environment, one where the structures of organisations have had to adapt in order to provide access to the original business and cost- effective processes.


The marketplace has become more commoditised and we see that trend continuing. Emergence of digital platforms and the increased fungibility of capital are key drivers that will shape the face of how we do our business going forward. Customers want cheaper, faster and better services. Investors want liquidity, sustained profitability and accurate assessments of the risk:reward ratios.


COOPER: Third Point Re has dedicated underwriting and asset management teams that are integrated into one separate company. Watford Re is a different permutation of that. You have an asset manager and a liability manager, which is Arch. I expect we will see more Watford Re models going forward.


There is a tonne of capital out there and that is commodity. With


the low interest environment it is difficult for investors to find yield at the moment, so reinsurance risk is proving attractive. What is a more scarce commodity however is the access to business, the underwriting talent and the ability to structure and manage that business. That is why you are probably going to see existing underwriting platforms potentially marrying up with asset managers to create more hybrid Watford Re-type structures, rather than the establishment of new, independent Class 4 entities.


MORRISON: You are seeing investors coming onboard—both banks and private clients—and taking a punt in a space that has not seen that type of direct individual investor in the past. Previously it was more institutional investors, whereas now funds are willing to put their clients’ money directly into reinsurance and insurance-linked securities (ILS) entities as part of a diversified investment strategy.


That is quite a shift. There is some expectation that some of these investors will retreat following a loss, and this is right to a point, but


“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.” Matt Wilken


there is little correlation with the wider capital markets and returns remain attractive compared with macroeconomic conditions.


THRESH: The pension funds have been on the leading edge of recent developments in the reinsurance space, acting as cornerstone investors. In areas such as run-off, which you might regard as risky and peripheral, they have been able to drive niches as the levels of capital they have at play is so significant. On the life side it has not been such a leap for high-net worth individuals to get involved in the space compared with P&C, particularly considering the relative returns. I expect to see further investor sets consider the space.


FAURE: I don’t anticipate radical innovation, but rather an evolution of capital markets involvement and a broadening of their footprint. They will continue to attempt to get into new lines of business and the next stage may well involve institutional investors looking to own or become reinsurers themselves. The difficulty at the moment is finding enough business to deploy that capital.


Participants who are on the fringe today through funds or sidecars


may well be tempted to get more directly involved in the re/insurance market by acquiring or creating companies or Lloyd’s syndicates.


PINCHIN: We believe in a hybrid model balancing the use of traditional and third party capital. We do not believe in one that adopts a higher level of risk for higher returns on the asset side as we already take sufficient risk in assuming our clients’ insurance exposures. In our opinion that isn’t a recipe for long-term success.


Strong underwriting, good analytics and astute risk selection


whether used on behalf of our own balance sheet to underwrite risks or on behalf of third party capital, backed by a top-class reputation for paying claims promptly is the model that we see as being in the best interest of long-term and mutually rewarding client relationships.


We will see different strategies evolving. It’s still too early to tell


who will be the winners and losers, but we believe 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.


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