ABIR: corporates may develop their own sidecars

Brad Kading, president and executive director of ABIR, believes that corporates may follow the industry’s lead in developing sidecars backed by third party capital.

Speaking at the International Insurance Society’s conference in London this week, Kading says the influx of convergence capital may prompt a rethink among those on the periphery of the industry.

“Such a development would represent a big shift for the industry as it takes even more risks away from the insurance industry,” Kading says. “My understanding is that several such schemes are in the pipeline and it will only be a matter of time until the first such structures are launched. They will look very similar to a captive but with the risk being shared with a third party investor willing to work directly with clients in this way.”

He adds that he also expects third party capital to increase its involvement in the casualty space, with Arch Capital’s Watford Re being the trail-blazer for increased capital markets interest in that sector of the market.

He explains that there could be several ways of marrying the long-tail nature of such lines with investor appetite including writing a mandatory commutation into the agreement or securing a reinsurance contract to cover liabilities after a certain period.

Despite the pressure from alternative capacity, Kading remains optimistic about the industry’s ability to grow. He highlighted three areas where traditional reinsurers will continue to enjoy growth.

The first is by taking on risks held at the state and federal level. Such schemes exist in many countries including the US, UK, France, Spain and Japan. “I believe these will increasingly move back into the private sector, partly because of the alternative capital and the extra capacity that creates,” Kading says.

Secondly, he believes emerging markets such as China and India have the potential to generate substantial growth. He notes that many parts of the Chinese economy are not covered by forms of insurance commonplace in the west. “This will change,” he says. “And when Chinese insurers start underwriting these risks more, they will need reinsurance.”

Finally, he stresses the potential of emerging risks. “There are many opportunities for those companies willing to invest for the long haul,” he says.