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

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.


That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.


Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]