ABR Re demonstrates shift in risk balance to asset side
ABR Re, the new vehicle launched by Ace and Blackrock, demonstrates the shift that is taking place in the reinsurance model with the balance of risk increasingly tipping towards the asset side of the balance sheet.
That is the opinion of Jason Carne, partner, KPMG Bermuda, who said that while the changing model is a good thing in some ways, the industry must tread with caution.
“It’s good for the buyers of reinsurance because there’s more capital in the market, so the buyers have more choice, and can probably get better pricing as well,” said Carne.
He also said that as a result, insurance companies or global reinsurers who have insurance operations, are arguably more valuable because they’re getting better pricing and possibly better terms on their cover.
He continued: “However, for a long time the reinsurance model has been that you don’t take risk on the asset side of the balance sheet, you take it on the liability side, but that’s somewhat turning on its head with these types of vehicles. Maybe they have to be a little more watchful than they otherwise would be when taking risk on the underwriting side.”
Carne referenced the ABR Re vehicle and explained that it will use a mix of BlackRock funds, some of which are highly liquid and low volatility, alongside some private equity, which is illiquid and more volatile. He said this means that the involved parties will need to demonstrate a lot of dedication to monitor the asset allocation within the reinsurer.
Jonathan Spry, managing director, head of insurance solutions and advisory at Stormharbour Securities, said other adaptations being seen in the market involve reinsurers embracing the capital and trying to use it themselves and reducing the amount of shareholder capital through special dividends or mergers and acquisitions. The latter could see money leaving the industry and not coming back if acquisitions are cash-financed.
However, he also said that the sophistication of the alternative capital should be questioned in comparison to traditional capital.
“How will investors behave when there is a big loss, or perhaps more important, a frequency of losses not all of which will have been well modelled and foreseen? That might be the test of its sophistication,” Spry said.
“This will divide the committed capital from the hot money. Some will stick around and possibly double up when there’s a better market, but some might leave. It will be a really interesting period for those managing that money as to who can demonstrate superior underwriting and capital management and retain their investors.”
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