ILS will work alongside traditional reinsurance

The importance of ILS in the reinsurance space is here to stay and allows greater flexibility in terms of the assumption and distribution of risk. However, it will not replace traditional reinsurance, but will work alongside it.

That was a key message from a panel of industry leaders speaking at the ILS Convergence 2014 conference yesterday.

Asked how the picture would change over the coming years, Costas Miranthas, president and CEO of Partner Re, said the approach to funding risk will be decided according to efficiency and the value that can be created for shareholders.

“As reinsurers is we assume risk and we distribute risk,” he said. “The question we have to face is, what is the most efficient way of doing that knowing that ultimately we are in business to create value for our equity shareholders. Some of the tools we have today available were not available 10 years ago.

Marc Grandisson, CEO Reinsurance, Arch Capital Group, said that the current environment looks set to continue for the next few years.

“The future will see more of the same. Interest rates are not going anywhere,” he said. “I think there is a natural tendency to seek alternative providers of capital. I also don’t think we will be obsolete as a traditional reinsurer. There is a whole industry built around factors such as case law, experience and knowledge – but it is good to have the alternative capital. I think it’s incremental, here to stay.”

He added that there will be room for opening up the spectrum of the risks addressed with alternative capital.

Lixin Zeng, CEO, Alphacat Management, agreed, saying that in the future there will be a balance between traditional reinsurance and ILS.

Tony Rettino, founding principal and portfolio manager, Elementum, echoed Grandisson’s comments that there is the potential to broaden the risk addressed with ILS capital.

“We’ve got now the mechanisms to expand and do that in other areas,” he said. He predicted that a portion of reinsurers’ balance sheets would address risk through sidecar-like vehicle.

The question will be whether there is sufficient transparency, sufficient ability to trade and sufficient liquidity around these mechanisms.

“If reinsurers and funds are better capitalised they are better able to respond to client needs, and that is fundamentally what we are trying to do,” he said.