With hedge and pension funds continuing to dive into the reinsurance market through insurance-linked securities, or ILS products, Peter Nakada urges the industry to get used to it and adapt.
Nakada, managing director at RMS, said these upstarts will only boost their presence over time, and that reinsurers should find a way to use this to their advantage and focus on their strengths as the market evolves.
“Insurance linked securities have become big players in this scenario and are getting bigger,” Nakada asserted during a session at RMS’ Exceedance 2014 conference in Washington, D.C. on April 16.
“This is a disruptive change and the companies that act smart and fast are the ones that are going to win this.”
So what is a reinsurer to do as ILS products increasingly jump into territory that was once solely their domain?
The answer, Nakada said, is to look at companies for inspiration such as Nike, the international sneaker giant that used to manufacture and sell its own products, but now outsources production and focuses most on what it does best: branding and marketing.
“Reinsurers should be challenged to think about where their competitive advantage is” in a similar way, he said.
“One of the reasons why the [ILS] funds are not doing more business is they are not set up like reinsurers are, to do business efficiently with the cedents,” he said. “Their core competency is more on raising capital than explaining what is going on. Reinsurers aren’t as good at raising money, but better at explaining risk.”
He said there are some ways to blend the best of both. Nakada predicted that there will be “a handful of reinsurers that figure out a way to plug into ILS funds, whether the agree to be bought by then, focus on partnering, launch their own ILS products or something else.
“They will get there,” Nakada said. “There will be consolidation in that space, and a handful of transformers who are providing good customer service.”
One risk: ILS funds could advance into detailed cat modeling, something that would further encroach into reinsurers’ turf. What then?
If that happens, winners in this space “will figure out ways to grow the pie into uncovered and uninsured, or unmodeled perils,” Nakada said, “rather than trying to duke it out [over] the more commoditized, well modeled [perils] where consumers are willing to pay right now.”