In its annual renewals review—this year entitled The route of profitable growth—Guy Carpenter highlighted capital management as one of the key means to drive growth in the re/insurance market. The report spoke of the value of reinsurance in driving down capital costs, the benefits afforded the industry by convergence with the capital markets and the potential for M&A in 2013 and beyond as being potential levers of growth for the industry.
The report also encouraged re/insurers to examine modelling assumptions more closely, to deal actively with the rating agencies in the face of tough economic conditions and the importance of domicile selection for the operational effectiveness of carriers.
Bermuda Re asked one of the reports author’s, David Flandro, global head of business intelligence at Guy Carpenter, a couple of questions regarding the rising significance of alternative forms of capital in the re/insurance space.
Is there a danger that further rate reductions on lines unaffected by loss and the addition of greater levels of non-traditional capital will erode the position of traditional reinsurers?
We don't see it that way. One important theme we've focused on over the last eighteen months is that of convergence. The dividing line between 'traditional' and 'non-traditional' capital is becoming less defined and we see this part of a much longer-term trend of the reinsurance market becoming more efficient. The most important thing is to utilise all forms of capital to find the optimal client solutions.
Facing further rate reductions and meagre investment returns, is there an expectation that reinsurers will pursue more alternative strategies for growth, such as through ILS or sidecar arrangements? How will such changes affect the insurer-reinsurer dynamic?
The issues you mention apply to both insurers and reinsurers. In our report, we emphasise solutions for profitable growth which risk carriers should consider in this environment. Optimal use and deployment of capital, be it alternative or traditional, is key to achieving this. It is crucial that carriers understand and optimise their cost of capital. Additionally, having the best strategy possible vis-a-vis rating agencies, and regulators, selecting the optimal domicile, and pursuing strategic mergers and acquisitions when appropriate can help achieve profitable growth in this environment.
Guy Carp, capital management, annual report