Rather than concentrating on the competitive dynamic, the industry should be viewing convergence capital as an opportunity to unlock new risks.
That is the view of Arthur Wightman, partner and insurance leader at PwC, Bermuda, who said that the industry should really be talking about the potential for greater risk transfer, rather than pressure exerted on rates.
He told Bermuda:Re+ILS: “we need to consider the bigger picture—how the industry can provide and unlock bespoke solutions to risk managers”. He said that alternative capital will inevitably continue to find its way into the industry and that as such re/insurers should be looking to source new risks.
Wightman said that flood and terrorism were perhaps the most obvious examples of risks that can be brought into the private market, with the first best suited to the convergence space, while the latter would find a more appropriate home in the traditional reinsurance sector, he said. Both offer considerable scope for premium growth and would help increase the risk footprint of the industry.
Addressing rising levels of convergence capital, David Law, global insurance leader at PwC said that while “it is fantastic that people want to put money into insurance”, the industry needs to be sure that investors fully understand the risks they are taking on. “There are always blips along the way, so you have to ask yourself ‘are investors fully aware of the risks?’”
He said that as the industry pursues opportunities in new lines such as cyber and in new and emerging geographies, there is a need to tread carefully, particularly in the case of convergence capital, which tends to have had less overall exposure to this market over a long period.
Wightman concurred that the industry needs to pay close attention to “risk selection, pricing adequacy and policy holder protection”; adding that unlike the traditional reinsurance sector, convergence capital has had a shorter history to comprehensively prove its resilience.
“Many argue that institutional investors are long-term and have done their due diligence over many years”, said Wightman, but he highlighted the importance of long-term certainty associated with convergence capital.
Addressing a comment Ed Noonan, CEO of Validus made at PwC’s 2013 Bermuda (Re)insurance Conference in which he highlighted the number of triggered ILS deals in litigation, Law warned that any potential increase in litigation in the ILS space could damage the reputation of the wider industry over time if it started to erode policyholder protection or the sustainability of capacity over the long term. This could in turn result in greater regulation and oversight, he said.
“These are not new issues to risk transfer with disputes or retraction of capacity being also present in the traditional markets”. He cautioned that the industry needs to work with such capital to ensure it understands its exposures, and highlighted that for the segment to grow as a whole structural matters needed appropriate attention as new risks were fed into the capital markets’.
PwC, convergence, alternative capital, ILS, Bermuda