25 November 2013ILS

Convergence making underwriters increasingly invaluable

The quality of underwriting talent is set to become increasingly important in the face of rising levels of convergence capital, as teams are deployed across traditional and alternative reinsurance structures.

That is the view of Jason Carne, managing director at KPMG in Bermuda, who said that “the quality of underwriting talent is increasingly becoming king”, adding that underwriters’ star has been on the rise for the past few years.

“As a skilled underwriter your worth has been going up. Not only do you have the opportunity to write in the traditional market, but you also have the potential to work for, or start up, your own ILS fund.” Carne said that he anticipates staff changes as a result of the changing landscape.

“I think those companies that are traditional players that have a strong underwriting team are going to make retaining that underwriting team a key focus. If you’ve got a traditional player with a very strong underwriting track record, that team could be in hot demand from other entities trying to get into the space.”

“Some of the large banks have been interested in taking positions in ILS funds because they like to be able to offer that solution to their investors, the institutional money that they manage or for high net worth individuals. We’ve seen an example or two of that in the Bermuda market.”

“If you get other money that comes in wanting to form its own fund, or forms a relationship with a highly respected underwriter with a great track record, you could see a situation whereby that traditional player could have an issue on their hands. Talent is more mobile these days. It’s going to be a challenge to keep those top underwriters in place.”

Carne added that if convergence capital gets comfortable with more long-tail risks such as workers’ comp, this will create even further demand for underwriters. He said that there are questions around whether institutional investors would get comfortable with the actuarial models necessary to write such business—as opposed to those models that are a feature of cat risk—but said that once they do their reliance on underwriting expertise “will further underscore the value of that talent”.   Investors have already signalled some level of appetite for non-modelled risk through their support of AIG’s recent Tradewynd catastrophe bond issuance and this trend looks likely to continue.

Carne said “It is well-publicised that some of the larger ILS funds have been turning capital away because they don’t think they can deploy it efficiently and they don’t want to erode their own rates—they don’t want to flood the market too much.”

“Equally, there are other start-up ILS funds out there working hard to get capital, and some of them probably wil be successful and some won’t. I certainly think we’ll see more coverage, more perils and more geographic zones entering the collateralised market,” said Carne.

Carne said that the influx of capital is proving a challenge to traditional players, who have been encouraged to establish third party capital managers in order to respond. He said he foresees a dual model approach being pursued by companies going forward, that will necessarily strengthen the hand of the best underwriters, particularly those writing lines that are a good fit for the ILS space.