Insurers lower cost of capital tops benefits of current cycle

Insurance CFOs believe that the lower cost of capital afforded by alternative insurance options is the top benefit associated with the current soft market cycle, a survey conducted by Towers Watson has found.

88 percent of respondents said that increasingly diverse alternative capital options are helping make their reinsurance purchase more competitive. 90 percent said that convergence capital had led to, or is anticipated driving, further decreases in reinsurance pricing.

It is apparent from the survey that there are opportunities within the alternative space, with 59 percent of respondents currently purchasing collateralised reinsurance coverage and only 27 percent using or considering favourably ILS products.

Stuart Hayes, senior consultant at Towers Watson says that the company anticipates “P&C insurers hastening their participation in various structures across the risk transfer spectrum, thus complementing their traditional reinsurance programmes”.

The complexity of contracts and deal structures remain an impediment however, with 69 percent of respondents indicating this remains an issue, while ambiguity related to contract triggers is a concern for 62 percent of insurance CFOs.

The survey found that 52 percent of respondents believe that the prolonged soft market will encourage consolidation in the reinsurance market, with 48 saying that alternative capital will have a similar effect.

It did however find that enterprise risk management is encouraging many insurers to consider their reinsurance buying more closely, with 31 percent stating that ERM is encouraging them to “buy significantly or somewhat more [reinsurance] coverage”