20 February 2014 News

Watford Re’s casualty focus is ‘game changer’

Competition for business is starting to heat up in the casualty markets as traditional reinsurers look to escape intense price wars in the property-catastrophe space and capital markets money also starts to move into this space.

Specifically, Andrew Newman, global head of casualty at Willis Re, believes that the formation of Watford Re, a sidecar launched by Arch Capital and Highbridge Capital earlier this year, represents a potential game changer for the markets because it will target casualty business.

“Two aspects of this model make this potentially transformational,” said Newman. “First, it confirms that new capital, in search of non-correlating returns, is willing and able to enter the casualty space and participate at the risk level, just as it has in the property-catastrophe market. Second, it expressly offers clients a product that has a lower cost of capital, or an improved investment yield, or both, integrated into its pricing model. This at least conceptually represents a possible game changer in long tail lines.”

Newman does, however, point out that the new capital pouring in from both the traditional reinsurance and capital markets is as yet untested.

He said: “As a collective, new capital entering the casualty space could be exciting, dynamic, cost-effective and valuable at an increasingly competitive point in the market cycle, and as such cannot and should not be ignored. At the same time all new entrants with whatever operating model should be scrutinized in the context of continuity given the significant time lag aspect of casualty business.

“Questions around market selection cannot be readily answered in a vacuum and only serve to enhance the value to clients of expert advice in an increasingly complex and inter-connected market. On casualty business, clients need thoughtful and informed support in understanding and measuring their casualty risk in order to manage it to within an appropriate risk tolerance framework. These current changes in market dynamics warrant providing heightened guidance for clients, critical to help them achieve the optimal balance between proven and sustainable reinsurance supply without forfeiting the opportunity to mitigate risk at potentially much lower cost.”

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