Consensus grows that ILS is a threat

The consensus that the rapid growth of the third-party reinsurance capital and insurance-linked securities markets could harm certain reinsurers reliant on traditional books of business is growing.

Michael Zaremski, an analyst at Credit Suisse, has become the latest analyst to argue that some reinsurers could be hit hard by this trend.

He highlighted the fact that growing chunks of very profitable cat business, which were previously underwritten by reinsurers, are now being taken by this form of capital. This will result in a growing pressure on returns for large reinsurers.

He joins a number of other investment banks who have cited similar concerns about the reinsurance market including Macquarie, Nomura and Numis.

Many reinsurers have now formed vehicles such as sidecars to leverage the opportunities in this sector. For some, the challenge is ensuring a company has the tools and expertise to make the most of those.

“The consensus seems to be that there is around $300 billion of direct property-cat business globally and the proportion of this being covered by alternative capacity is growing,” said Jonny Creagh-Coen, head of investor relations at Lancashire Group.

“But the biggest question of all is as this market grows in size, what would this mean for traditional reinsurers? This is unquestionably a concern.

“For a traditional player, that means that if a large portion your dinner is being taken away before it even gets on the table. This would mean both the revenues and profits of traditional players would be under pressure.”

Lancashire has been especially innovative in leveraging third party capital. Its first sidecar, launched in 2006, covered offshore energy risks while its more recent sidecar ventures – Accordion (formed in 2011) and Saltire Re (formed in 2012) – take this strategy further. Saltire especially is designed to participate in both cat and non-cat risks.