Traditional reinsurance model is dying’
The traditional catastrophe reinsurance model is dying and won’t exist in ten to 15 years, delegates to the Insurance Day 2014 Summit Bermuda were told yesterday.
This provocative prediction was made during the opening day of the event at the Fairmont Hamilton Princess by a Bermuda market professional.
Founder of the Horseshoe Group Andre Perez told the delegates: “Maybe not so much the large, established multi-line reinsurers, but the traditional catastrophe reinsurance model is dying already.”
The Horseshoe Group is a leading provider of insurance management services to insurers, reinsurers, sidecars, transformers, and catastrophe bonds.
Mr Perez was referring to the creeping instance of the use of third-party capital to support the underwriting of re/insurance risks.
Alternative market capital and the effect on the industry was part of the subject matter under discussion by a panel focusing on “The evolving role of reinsurers in the ILS (insurance linked securities) space.”
The panel included Nephila Capital partner David Oliveira, head of Risk Trading Unit of Munich Re Rupert Flatscher and Appleby partner Brad Adderley. The moderator was Insurance Day editor Michael Faulkner.
Mr Perez pressed his point regarding the traditional reinsurance model, stating: “It will have to die because what ILS has already proven, from my perspective, is that reinsurers will eventually become glorified MGUs (Managing General Underwriters).
“You have the expertise, the business access and the underwriting excellence. This is true. But now you have different forms of capital with a different risk appetite and different risk profiles.
“You are going to become in the future a servicer to risk capital — no different than an ILS investment manager or a bond fund, an equity fund and other funds.
“Why couldn’t we change that model, servicing different risk appetites, as opposed to being stuck with permanent capital and being a slave to your shareholders, and not actively manage your reinsurance portfolio.
“At the end of the day, insurance contracts are just like investment instruments where the bet is on underwriting performance.
“But in 20 years’ time, I think we are going to see a very different landscape. And it is getting worse because it started with property cat (reinsurance), but we are starting to see other lines ‘invaded’, including terrorism and crop.
“If you think of Nephila (Capital), it is just that, an investment manager servicing pools of capital with different risk appetites.”
But Mr Flatscher of Munich Re pointed out that the alternative market capital may be happy with their returns right now, and happy to be investing in insurance risks, like hurricanes and earthquakes, especially in recent years when there have been fewer significant events.
But he said, those same capital market players may change their tune when they start seeing regular losses.
“But what happens if it is a big loss,” he said. “How many will stay? The story for investors is great right now. In no year have they lost their equity. What happens if they lose money the first year, a second year and a third year in a row?
“The reinsurer is used to that market and will stay.”
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Ada Foggo (1928-2020)
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