30 May 2013ILS

Convergence capital will drive strategic change

Rising levels of convergence capital will require a change of strategy among reinsurers, with those that lack an identifiable brand or the underwriting expertise likely to be left behind.

That is the view of Bill Dubinsky, head of Willis Capital Markets & Advisory, who told Bermuda:Re  that the convergence market, which had for many years been viewed as a sideshow, has now entered the main tent.

“Previously the convergence space did not have an impact on the strategy of reinsurers. But over the last eighteen months—and certainly over the last six—that has changed in a clear and decisive way. There are now parts of the market where frankly traditional reinsurance simply isn’t competitive”.

As a result reinsurers will need to re-examine their position and involvement in the convergence space, said Dubinsky. Although not a zero-sum game for the market, “reinsurers have to engage with this issue at a strategic level”. He said that they face a number of alternatives, including “managing investor money alongside their own equity holdings, joint ventures with specialist investors, or accessing investor capital as a form of retrocession”, but what is apparent is that they will have to adapt to a new norm.

Dubinsky added that reinsurers may also consider becoming net underwriters, accessing the capital markets directly. Rather than leaving the market to insurers, he said that if reinsurers are able to access convergence capital and deliver solutions to primary players in an efficient and cost effective manner, they will be able to establish a valuable position for themselves within the space.

Locked out

Dubinsky said that reinsurers will continue to prove their worth in terms of their understanding of risk, their underwriting capabilities and claims handling function, but added that in “some parts of the market they won’t be able to get paid purely for their capital”.

He said that traditional rated and regulated reinsurers will continue to be the most efficient capital structure in diversifying geographies, but that for peak perils convergence capital will become increasingly attractive.

Dubinsky said that investor interest in the convergence space is unlikely to tail off any time, with brokers increasingly considering “blended solutions” for their clients, extending the “best solutions to clients, whatever form they may be”.