- Shift in buying strategies towards managing volatility
- Marketplace ‘vibrant’ as buyers capitalize on full array of products
- Move to de-commoditize solutions driving up product complexity
Since its beginnings, the reinsurance product has been a tool that delivers diversified balance sheet solutions to insurers to help protect capital, manage earnings, reduce volatility and promote profitable growth, according to James Nash, President, International, Guy Carpenter.
“The effectiveness of reinsurance as a capital substitute was highlighted by the global financial crisis of 2008, where debt and equity financing were not available to our clients – reinsurance stepped in as the only source of readily available capital,” Nash says. “In the period following the financial crisis, some insurance entities, with balance sheets repaired, chose to retain more risk and consolidate covers as ceded premium flattened out.”
In the current environment, Guy Carpenter sees growth in reinsurance purchasing in virtually all its forms not only protecting capital but managing volatility. The marketplace is vibrant and buyers are capitalizing on a full range of available products.
“Clients, from global insurance giants to specialty niche Lloyd’s underwriters, have unique risk profiles. Solutions for earnings protection are not ‘one-size fits all.’ Some may seek protection for one large severity event and others may seek protection for frequency of occurrences on an aggregation point,” adds Julia Chu, Managing Director. “Regardless of where this risk comes from or how an optimal solution is designed for them, the universal goals are more consistent quarterly/annual earnings that many investors prefer and that, in turn, allow those companies to attract higher price multiples.”
“As clients focus more on protection of earnings and the value that stability brings, they have shifted towards more expansive covers and the availability of a broader array of reinsurance solutions on offer.”
Nash adds, “As reinsurers seek to de-commoditize their offering we have seen an increase in product complexity and a willingness to offer innovative and customized solutions to help meet their clients’ goals and growth ambitions. Innovations may include special coverage features applying to specific industries or risks unique to specific clients.”
“The decade beginning in 2005 saw society change at a rapid pace. However, the insurance industry, faced with a series of regulatory challenges in addition to the global financial crisis, was slow to innovate. It is now playing catch up, creating an environment of opportunity for insurers to innovate product and business models.”
Reinsurers willing to exploit a move by some segments of the insurance market to a capital-light structure can find opportunity in the changing paradigm of manufacture and distribution of risk. Similarly, opportunities present themselves to those willing to support new primary product development and partner with their insurance company counterparts to support growth initiatives.
Nash mentions that clients continue to turn to reinsurance where optimal structuring of programs minimizes regulatory capital in countries with Solvency II regimes and beyond. “We have seen an increase in the number and frequency of loss portfolio transfer deals, such as the recent Berkshire Hathaway transaction for AIG. Transactions to free up capital, prevalent in the non-life sector, have increased in life companies looking to free up capital through distribution of significant blocks of life business into the reinsurance market. This is an area that presents increasing opportunities for the intermediated market.”
“In today’s world of unprecedented rapid change and disruption, the reinsurance solution for managing capital and earnings is as relevant as it has ever been,” Nash explains. “However, the use of alternative capital solutions through the use of sidecars to parcel risk through reinsurers into the capital markets has created the potential for a capital ‘lock up’ in segments of the market and the industry continues to seek solutions for ensuring liquidity, post event.”
As we enter the 2018 renewal, we see a reinsurance market with significant capital to deploy and an increasing number of vehicles in which to deliver that capital to risk as the industry takes advantage of an opportunity to de-commoditize its offering.
Click here to register to receive e-mail updates >>