Regional and super-regional carriers may start getting more attention from reinsurers in advance of Jan. 1, 2014 renewals, a broker representative predicted recently.

During the PCI Annual Meeting in Boston, where reinsurance company and broker representatives at least equaled—and possibly exceeded—the number of attendees from member companies of the Property Casualty Insurers Association of America, this year’s influx of alternative capital into the property-catastrophe reinsurance market was among the hot topics. More than $45 billion of alternative reinsurance capital has been supplied by pension funds, hedge funds, dedicated catastrophe funds and others investing in insurance-linked securities and collateralized reinsurance vehicles, according to broker reports released earlier this year.

And while the most frequent year-end predictions centered on pricing consequences, Phil Campbell, executive vice president for BMS Group in Minneapolis, added a slightly different forecast.

“Reinsurers are starting to create new departments or new underwriting groups that specifically target regional and super‑regional type companies,” he said. “Those buyers and those sectors will enjoy a more robust or wider spectrum of alternatives when they go to the reinsurance market looking for pricing.”

The regional sector is “not being buffeted by the alternative capital that’s coming into the marketplace,” Campbell said, explaining why the traditional reinsurance market is rediscovering a sector that is “not a particularly volatile [or] particularly exciting part of the marketplace.”

“As a reinsurer, if you’re seeing volume being diverted from the introduction of this alternative capital, and yet you still would like to maintain your own premium volume, then you need to seek sources of the reinsurance marketplace [with] more stable buyer[s],” he said.

Separately, Frank Harrison, president and chief executive officer of New York-based Holborn Corp., gave a sense of the intensity of the wave of alternative capital rushing into the market, which he said hasn’t abated.

It’s the Wild West,” Harrison said. “It’s quite unbelievable. There are such substantial volumes of capital on the sidelines trying to find the best way to deploy it into our industry,” he said. “I’ve never seen anything like it.”

Harrison said he’s aware of several initiatives taking shape in which capital providers are looking for a way into the business. “What they need is an infrastructure and underwriting expertise. If they can find the right horse to back, there are huge sums of money ready to be deployed in this industry right now.

“Clearly, that’s going to have an impact on pricing, overall,” Harrison said.

Beyond Models & Market Conditions

Both men and other reinsurance experts, however, said that any predictions of the demise of the traditional reinsurance market are premature.

Giving the perspective of his insurance carrier clients, Harrison said that the larger national carriers among them—those with very substantial capacity needs—already trade with the alternative market. But the bulk of Holborn’s clients, many of which are regionals and super-regionals, are not all that interested.

“In so many cases, we get away from a relationship‑based transaction to just a commodity‑based transaction. They’re generally opposed to that” because the focus becomes “market conditions and model results” with the alternatives.

“Most of our clients pride themselves on their ability to underwrite. They pride themselves on the way they produce the business, the way they settle claims—and they want that recognized and reflected in the way they cede their risks to the marketplace.

“The pure traditional reinsurer, that model, is far, far from dead. As a matter of fact, it’s so much more user‑friendly. It’s been time‑tested,” he said.

Harrison also noted that he’s heard some market intelligence suggesting that three of four catastrophe bonds that were triggered as a result of Superstorm Sandy are now involved in coverage disputes.

“One of the litmus tests for approving security in our office is not only the ability to pay but the willingness to pay. Part of the willingness to pay is having a track record,” he said, noting that while alternative capital has been present in the reinsurance industry since the mid-1990s, its track record is still sparse. “That gives a number of our clients pause for concern.

“They’ve also told me they’ve been able to build their underwriting operations over generations and over decades with the traditional market. They’re not about to abandon them now,” he added.

A Complement, Not a Replacement

“If there’s an opportunity to complement something they’re doing, [then] I think people will test the waters,” Harrison concluded. But addressing the potential for the alternative market to come in and replace the traditional market, “I see no scenario where that happens right now,” he said.

The traditional reinsurance marketplace still provides well over 85 percent of reinsurance products that are purchased, with 12-15 percent of the marketplace being provided from alternative capital, BMS Group’s Campbell said. “I suspect that will at least continue at those levels, and as that industry becomes more efficient, it will probably even find itself attracting sponsors from smaller‑sized companies,” he said.

Frank Harrison“Most of our clients pride themselves on their ability to underwrite. They pride themselves on the way they produce the business, the way they settle claims—and they want that recognized and reflected in the way they cede their risks to the marketplace.”

Frank T. Harrison, CEO, Holborn

I would think that would be a pretty broad statement to consider, that the traditional reinsurance marketplace is no longer relevant to the same extent and that perhaps new capital or alternative capital has gained a foothold on the platform of relevancy,” Campbell added.

“There will always be things that alternative capital is well suited for, but they will never be able to accomplish the same level of relationships” as traditional reinsurers that have deepened and broadened over the course of decades.

“Traditional reinsurance players out there will continue, and they will be seen by buyers as very stable business partners that can be relied upon, both in good times and in bad times, to provide a very valuable product.

“That doesn’t mean you can’t knit together, in some nice mosaic, a combination of reinsurance structures that tap into both traditional capacity and alternative capacity. I just don’t see the balance of that mosaic tipping to favor alternative capacity [in the] near future.

“I do think alternative capacity is around to stay—and I think it will evolve in various forms over the next several years—but I think that it will always be a subset of the marketplace and not a dominant part of the marketplace, at least for the foreseeable future,” Campbell said.

Mike Schnur, a partner with TigerRisk whose clients are large buyers of reinsurance, said those clients are taking advantage of alternatives. But like the others, he thinks the traditional reinsurance model is here to stay and that alternatives provide a nice blend of capacity.

“There’s a lot of loyalty built up between clients and the traditional reinsurers,” who have been around for many, many years and paid many claims. “They have been there through market cycles,” Schnur said.

While much of the third‑party capital at this point is untested, “the one thing that the third‑party capital has done is [to make] the traditional guys…more willing to be open to new ideas. “For many years, traditional reinsurers have sold what they wanted to sell,” but with competition being brought in by third‑party capital, “they are listening more to what the client wants to buy and trying to adjust to that.”

“Some are moving faster at that than others, but I think everybody is aware that they need to rethink their whole business models,” Schnur said. “I think frankly it will create a much more efficient and a better market long term.”

Campbell said that one benefit he has seen is increased reinsurer willingness to offer multiyear covers. “Locking up that relationship with a key client, with a traditional product at a price that is mutually acceptable, is one way for reinsurers to maintain the continuity of that premium volume and also the continuity of that client relationship.”

Greg Schiffer, chief property underwriter for Swiss Re in North America, agreed with the brokers that “there will always be a place for traditional reinsurance.”

“There’s probably room as well for the alternative capacity that’s coming,” he said, adding that from a reinsurer’s standpoint, it’s important to be diversified and to stand ready to provide clients with tailor‑made solutions.

“Some of our clients are looking to optimize their reinsurance program, not necessarily buy more or less but to buy in a different way. They may want to protect against frequency or severity, or a combination of both. They’re looking for reinsurance partners that can offer that to them,” he said, noting that flood events and frequent non-peak loss scenarios are becoming top-of-mind for a growing number of cedents.

Schnur-Mike.01e[1]For many years, traditional reinsurers have sold what they wanted to sell, but with competition being brought in by third‑party capital, they are listening more to what the client wants to buy and trying to adjust to that.”

Mike Schnur, Partner, TigerRisk

“If you look back to the mid-90s [when] catastrophe bonds arrived on the scene, we thought that was going to be the end of the traditional reinsurance market—and it wasn’t.

“There are many other milestones through the years that we thought would influence it as well. The traditional market or the traditional reinsurance is still intact,” he said.

Topics Carriers Agencies Underwriting Reinsurance Market