Lara Mowery, Global Head of Property
The impact the capital markets have had on the property catastrophe reinsurance space is undeniable. Analyzing 2013 market activity, it is also undeniable that much of the movement the market witnessed is as much driven by traditional reinsurers’ changing behaviors. While companies buying catastrophe coverage benefitted, across product type and geography, from collateralized capacity in the market, deployment of this capacity has been targeted.
When reviewing the actual participation of collateralized markets, there are distinct patterns that highlight the focus and strengths of these markets. Reviewing the breakdown of collateralized authorizations as a percent of total authorizations by product type underscores the clearer affinity collateralized markets have for products such as aggregate, underlying or drop-down, top end and reinstatement protection. Collateralized markets made up a fairly small percentage of traditional catastrophe excess of loss authorizations.
Collateralized markets do not typically offer a reinstatement, which many companies view as essential coverage in their traditional core program, either due to their own risk management guidelines or due to rating agency requirements (or both). Beyond the reinstatement issue, there is significant evidence that companies put tremendous value on historical relationships: knowing their business partners, the understanding they bring to the reinsurance transaction, their flexibility as a client’s circumstances change and a known quantity of very swift claims payment practices.
In many cases, if companies could retain their traditional coverage and relationships at current market pricing, they did. Traditional reinsurers responded to provide this plus more, creating an unsurpassed environment of client focus and innovation.
However, as companies look to strengthen their overall risk management strategies, collateralized markets have provided attractive options that complement the core protections such as filling in on the top end (where there is less need for reinstatement), drop down and aggregate coverage. Many of these products are efficently priced and well tailored to specific client needs, in addition to providing collateralized capital. It is also clear that well seasoned collateralized markets are addressing ways to broaden coverage at the same time many traditional reinsurers are leveraging collateralized capital or creating their own collateralized offerings.
Given the more diverse mix of business at January 1, and plenty of unused capital, collateralized markets are continuing to evaluate their appetite for more diverse products or unique approaches to providing the coverage they are currently targeting, especially as traditional reinsurers focus on strengthening their offerings even further.