In for the Long Term

Low interest rates fuel a continued flow of third party capital into the reinsurance market.
By: | September 1, 2013 • 7 min read

Delegates at this month’s Monte Carlo Reinsurance RendezVous will have as many issues as ever to digest over coffee at the principality’s terrace cafes — not least the relentless rise in third party reinsurance capital and the insurance linked securities (ILS) market, which are making steady inroads into the books of business held by traditional property/casualty reinsurers.

A report by Guy Carpenter suggested that around 15 percent of the global property/catastrophe reinsurance market will be represented by alternative capacity in 2013, including catastrophe (Cat) bonds, industry loss warranties (ILWs) and other collateralized reinsurance, against around 8 percent in 2008.


The threat to market share, pricing and profits — currently one of the high margin lines for reinsurers, will be “a hot topic at the RendezVous,” said Stefan Holzberger, managing director, Analytics at ratings agency A.M. Best.

“The demand for ILS is already leading to sharp reductions in rates. In fact, ILS investors drove down rates on Florida natural catastrophe by roughly 15 percent for 2013 renewals. The traditional markets felt this pressure and were forced to drop rates themselves to remain competitive,” he said.

So what this means for January 2014 renewals will definitely be debated by Monte Carlo delegates.

A recent research report by Michael Zaremski, an analyst at Credit Suisse, spoke of the increasing pressure that both third party capital and ILS are putting on the traditional players. Institutional capital market investors such as hedge funds, pension funds, high net worth individuals and specialist insurance-linked fund managers are increasingly venturing into the global reinsurance market.


Credit Suisse is, of course, widely recognized along with Nephila Capital (with an estimated $9 billion of assets under management) and Fermat Capital Management as being one of the main alternative capital providers that has done so much to shake up the market.

More recently, Leadenhall Capital Partners, the joint venture between Lloyd’s of London group Amlin and former Swiss Re alumni John Wells and Luca Albertini has enjoyed considerable success in growing its assets under management (AUM). In addition, the success of Securis Investment Partners since its first fund launched in 2005 persuaded Northill Capital to acquire a majority interest last year.

“P/C reinsurers are in the midst of a transformative period whereby competition from external ILS market growth is testing and transforming current business models,” wrote Zaremski. “Traditional reinsurers are weighing and/or balancing internal ILS platform start-ups, which pressures returns within reinsurers’ existing legacy portfolios given the competitive overlap of many ILS structures.”

He singled out for special mention the Cat bond market, which was taking up major chunks of business from reinsurers such as Validus — whose shares dropped sharply when the report was first issued, although the group has set up its own third party capital operation in the AlphaCat ILS funds and also has sidecar vehicles.

“Cat bonds will continue to make inroads into traditional reinsurers’ business,” Zaremski predicted. “Reinsurance has become more of a commodity, due to lower barriers to entry and vendor models.”

Equally concerning for reinsurers was the recent report from Swiss Re that Cat bond pricing has fallen by as much as 35 percent in the past year and made them for the first time as cheap as traditional reinsurance, or possibly even cheaper.

Cat bond issuance peaked in 2007 at $8.2 billion in the aftermath of hurricanes Katrina, Rita and Wilma, but 2013 is on course to match and possibly exceed that figure, according to Swiss Re.

However, the group’s head of ILS Structuring and Origination, Markus Schmutz, doesn’t believe that it will entirely replace traditional reinsurance. “Cat bonds will always complement the traditional market and sponsors will place a certain share of their [reinsurance] program into this market to get diversification,” he predicted.

A Growing Share

Others commented that while the relentless advance of the ILS market is not about to be halted, it is still relatively small compared with the overall reinsurance sector and, as Holzberger pointed out, is mostly limited to catastrophe risk. The majority of ILS deals to date have covered U.S. windstorm and earthquake, and European windstorm.

“Within the reinsurance market segment, nontraditional capital providers are estimated to make up roughly 15 percent of capacity — although this will likely increase in the years to come,” he added.

Paul Schultz, chief executive of Aon Benfield Securities, said prospects for further growth in ILS are strong, due to the established track record of good investment returns that they have demonstrated coupled with the fact that there are currently fewer opportunities to invest in alternatives than there have been traditionally.

He also admitted that the managers of alternative capital are ensuring that they have the necessary underwriting and analytical talent. “Some of our colleagues at Aon Benfield are among those who have moved over to the new providers to take on the role of analyst and manager.

“Whether the market will continue to grow or will plateau sometime in the near future is hard to say although we really don’t foresee any decrease in the flow of capital coming into the industry,” Schultz added.

This view is based partly on the fact that a fairly long decision-making process precedes any decision made by institutional investors to commit to a particular market. “The 2008 global financial crisis demonstrated the low-correlated nature of the returns provided by ILS, which has encouraged more of them to enter the market — particularly the pension funds,” he said.

This trend was noticed relatively early on by the more astute traditional reinsurers, which responded to growing investor interest in the reinsurance market by establishing their own ILS or collateralized reinsurance vehicles, but others are belatedly putting similar plans into action.

Alastair Speare-Cole, chief executive of JLT Reinsurance Brokers, said that the convergence market created by the coming together of insurance and the capital markets has, so far, proved to be highly transparent, with even investors in vehicles such as sidecars confident that they are taking a slice of the portfolio in a narrow area for only a limited period of time.


“This investment proposition is undoubtedly a threat to the existing players, who are losing major chunks of business,” he noted. “And as the asset class becomes steadily deeper and more liquid, so it continues to attract new capital.”

It could also, in time, see the new capital venture beyond P/C reinsurance, Speare-Cole suggested. “Liability classes are certainly more problematic an investors’ proposition and there are many different issues involved. Nonetheless, we might see a more tradable position emerge over time, for example focusing on the ‘dead’ business with a run-off portfolio.”


Room for All?

But should traditional reinsurers necessarily regard these newcomers as a threat, or is there enough business out there to keep all parties happy, especially given the tougher new capital adequacy requirements set out under the Solvency II regime?

“As respects capital requirements, the allocation of AUM to the insured event risk class by the capital markets is but a small fraction of the total,” Peter Hearn, global chairman of Wills Re, pointed out. “Assign a 1 percent asset allocation to insurance event risk and it would equal 87 percent of the estimated global reinsurance P&C surplus.”

He noted that the pension funds also enjoy a competitive advantage over traditional reinsurers relative to their cost of capital, enabling them to write P/C reinsurance at a lower margin than the longer-established market participants.

Hearn added that the prolonged low interest rate environment that has resulted from efforts to kick-start economies on both sides of the Atlantic has undoubtedly contributed to the influx of new capital into the reinsurance market. Once rates begin to climb again, other forms of investment will regain their attraction.

“There are potentially several other factors that could bring about a reduction in the current inflows,” Hearn said. “These are, in no particular order, capacity and/or margin compression, significant loss activity, model uncertainty, inflation and alternative asset classes offering similar returns but less volatility.”

It would take a very large loss to staunch the influx of new capital.

As Speare-Cole noted: “A loss in the region of $20 billion no longer qualifies as a major event. To cause disruption, the figure either needs to be substantially more — or some totally unexpected development occurs, something that has never been factored in by the market and fundamentally challenges the basic assumptions that underpin the new capital.”

A.M. Best’s Holzberger agreed. “These [new] investors understand the risk, and demand for alternative vehicles such as ILS still far exceeds supply,” he said. “It is possible that a year of ILS losses could scare away some capital market players, but the reality is that there would likely be several new entrants ready to take their place.”

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.


Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.

R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.


We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?


Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.


Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.


More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]