a regulatory perspective these are fairly straightforward products in that we’re looking for disclosure. And what people coming into the market are willing to disclose or not disclose has really changed significantly.
The products have become more mainstream. People are a lot more comfortable with some of the terminology, what an ILS bond structure represents. When we first started working in the space in 2009 there was a lot of holding back of information; now there’s a real understanding of the significance of transparency and that’s healthy because you start to attract more diverse investor interest.
Marsh: The trend with cat bonds is that they are becoming very homogenous. This year in particular, the majority of the issuance has been low-yielding, Florida wind-exposed risk, so it’s very limiting if you’re building a portfolio where you have risk constraints to adhere to. The missing link for a lot of managers is how to get access to other more diversifying risks and instruments to complement that portfolio.
The focus of the more sophisticated managers is on how to use their analytical capabilities to offer more complex and customised products to better fit the cedant’s needs. It is not clear that the catastrophe bond structures are ready for this transition yet, although we are seeing some of this trend based on the increased number of indemnity transactions as well as the use of aggregate triggers.
Kramer: There are large sectors of the market that don’t work for ILS. If you’re writing long-tail business with a 1 or 2 percent premium, you can’t put that in a cat bond, yet the primary insurance companies can write it because they can write 4:1. If you write a collateralised contract with a 2 percent premium rate on line, and you’re putting up 98 cents for 2 cents, the returns will be nowhere near what the market requires.
People have to find out ways to leverage these sectors in order to get the returns, and those are low probability losses, so you’ve got some of the very big companies up there taking all this business.
Adderley: Despite the larger deals, there’s still a lot of interest in the smaller ones. A lot of traditional insurance platforms are pursuing
these smaller lines. Five years ago we saw neither these large lines of $1.5 billion nor the smaller lines of say $10 million on the BSX. So it’s almost as though both ends are growing at the same time. And there’s definitely a lot of interest in people forming platforms for these smaller collateralised bespoke sidecars.
How are different players in the market looking to differentiate their offering?
Brooks: There are two sides to the question: it’s how you differentiate yourself with investors, which is the value proposition you’re offering as a manager, but it’s also how you differentiate yourself to reinsurance buyers, because at the end of the day, capacity looks fairly similar across different providers.
We focus on the fact that we’re affiliated with a large reinsurance company, to provide investors with the resources that are built into the overall company, which we really think of as analysis and origination. We have a large research team based in Canada—more than 30 people— who are dedicated to scientific research as well as cat modelling.
So we feel that we’re providing an edge in terms of our ability to analyse risk. The footprint that the overall company provides is an advantage in terms of the ability to originate business so the trend over the last year of increasing club transactions has benefited AlphaCat, as part of a larger group.
The other side is more challenging—how you differentiate yourself to a reinsurance buyer. Traditionally for convergence claims it’s been about credit quality. Differentiating collateralised capacity is somewhat difficult, you’re always going to be somewhat similar to other collateralised players. In effect, if you take it to the extreme it’s all collateralised, so there’s probably no differentiation among providers at all, so you end up having to work on softer skills such as speed of execution, reliability in terms of claims processing, and the extent that you can provide value to the buyer in terms of understanding their own risks.
These points are useful because when you’re part of a reinsurance company there’s a reputation at stake which fosters an understanding that claims are
31 Bermuda Finance | 2014
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