Alternative capital is still flowing in, claims Bermuda Reinsurance Conference panel
The flow of so-called alternative capital into the global reinsurance market is continuing apace, bringing true so-called convergence whereby traditional providers will simply become conduits to the capital markets ever closer.
That was one of the sentiments of panellists at the 2016 Bermuda Reinsurance Conference sponsored by S&P Global Ratings and PwC Bermuda.
Much of the evolution of the market has come in the form of insurance-linked securitisation (ILS) such as catastrophe (cat) bonds, which were first conceived some 20 years ago in the aftermath of Hurricane Andrew. Still, convergence remains in its early stages compared with its eventual potential, panellists told attendees of the conference.
"We're just starting to see securitisation change the underlying industry," said Michael Millette, managing partner at Hudson Structured Capital Management. He added that the cat bond market has reached roughly $25 billion outstanding, but that it can "take a long time for other asset classes to gestate."
Nevertheless, the influx of alternative capital has grown rapidly in recent years (with a slight slowdown in 2015) to reach more than $75 billion with dozens of funds engaged in collateralised reinsurance.
This growth has been driven by historically low interest rates – particularly in the US – which have pushed investors to seek returns outside traditional fixed-income assets.
Dirk Lohmann, chairman and managing partner at Secquaero Advisors, said that although there's a limit to what the capital markets can do, securitisations are a benefit to insurers.
"There's a lot of potential for securitisation to optimise insurance companies' capital structures," Lohmann said.
Some in the market see the distribution chain of insurance as inefficient, with too many entities involved (including brokers/agents, insurers, reinsurers, retrocessionaires, etc.) in getting the capital to the risk, with each one taking some of the profit. Some estimates suggest 20 percent of premium is going to the distribution chain.
This raises questions about which entities will take on which roles in an evolving market, the panellists said. All agreed that there's a symbiotic relationship between traditional players and the capital markets, and that the former will continue to be a valuable part of the market, even as many see alternative capital as more nimble.
With regard to the potential pitfalls associated with this trend, the panellists largely agreed that investors – who 20 years ago would have considered the market for cat bonds to be too opaque – are much better informed in the current market.
Areas that might be ripe for ILS include flood coverage and cyber protection, panellists said, though the latter would likely take several years. Either way, that there will be growing pains associated with the expansion of that market – specifically with regard to pricing.
