going to get paid in an appropriate way, and there’s some comfort when the relationship is continuous. As a group, Validus has been able to form partnerships with reinsurance buyers to help them understand their own exposure portfolios and provide the analytics and tools that we’ve built in-house that don’t really exist for third-party vendors.


Pollett: When pension funds make their first allocation to this asset class, they typically start with the big established funds first, often guided by the investment consultants. When they get comfortable with that investment, they look to build out their allocation with fund managers who provide some diversification benefit within the asset class.


Blue Capital is not so much trying to compete with the big established funds, but providing a product which is complementary to their existing allocation within the asset class—just like within the equity sector where you have different styles of equity managers. At Blue Capital our differentiation is that through our relationship with Montpelier Re we have access to the whole traditional reinsurance market, we have the infrastructure to enable us to understand and price the underlying risks, but we also have much more of focus on small private regional insurance companies with predominantly residential exposures, and that’s how we position ourselves.


Our approach is to explain why investors should allocate to us in addition to another established fund, rather than instead of another fund. Everyone has their flag that they can raise which explains why they’re a little bit different and why they would be a complement to the investor’s portfolio.


Kramer: We understand the underwriting skills—it’s the investment skills that have to come in order to understand portfolio analytics. You may look at a piece of business with a 15 percent return which is very attractive, but it correlates with something in your portfolio, and it’s that kind of analytics that is essential.


Marsh: From our standpoint it’s always been about being innovative; not necessarily just thinking about products no-one else has thought of, but taking that a step further and finding out why the market operates the way it does. What are the constraints from a cedant’s perspective,


32 Bermuda Finance | 2014


and how much do the rating agencies influence how the reinsurance companies operate, for example.


As a collateralised player in the early days it was always about educating investors, getting them familiar with natural catastrophe risk. Now it’s more about educating the cedants and customising solutions for them. It’s also about being nimble as the market changes, adapting as the market becomes more crowded, taking a step back and reassessing the situation.


Can new risks and new geographies be added in, and how challenging is this?


Marsh: Everyone has their own expertise. We continue to focus on pure cat risk although we are keeping an open mind for the future if we feel there are compelling reasons to go into a different area and hire expertise to support that. Most investors evaluate the whole landscape of ILS offerings before investing and choose the manager they think does the best job considering their need.


Sometimes that means selecting multiple managers with complementary strengths or strategies.


Pollett: The rated companies have a huge advantage over collateralised products in most lines outsides of property catastrophe as they can leverage their capital many times over. It’s difficult to make collateralised protection, which is typically invested in three-month Treasury Bills, generate anywhere near sufficient returns from longer tail business. And that’s assuming you can find capital committed long enough to pay the claims, which you can’t.


One solution is to find a rated carrier who is willing to front the business, providing the leverage by retaining the tail risk, but even then it works only if you have the flexibility to take a more aggressive investment strategy. That’s exactly what the new wave of Hedge Fund Re companies are attempting although that strategy is attractive to investors for reasons other than the pure uncorrelated risk premium the reinsurance business provides.


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