Corporates could soon form their own sidecars

The influx of alternative capital into the industry in recent years will permanently change the industry’s capital structure, believes Brad Kading, president and executive director of the Association of Bermuda Insurers and Reinsurers (ABIR) speaking at this year’s International Insurance Society’s conference, which is being held in London this week.

What is more, he believes many innovations around the way this capital can be used are still to be unveiled. One of the developments he foresees will involve large corporates partnering with investors to form their own sidecars – using them in a similar way to captives but with third party investors taking a large portion of the risk.

“Such a development would represent a big shift for the industry as it takes even more risks away from the insurance industry,” Kading said. “My understanding is that several such schemes are in the pipeline and it will only be a matter of time until the first such structures are launched. They will look very similar to a captive but with the risk being shared with a third party investor willing to work directly with clients in this way.”

He notes that he also foresees other ways in which alternative capacity will increasingly find ways of participating in risks outside its traditional scope of property-catastrophe risks in peak peril zones.

It will increasingly find ways of participating in casualty risks, he believes, noting that Watford Re, formed by Arch Capital, represents a good example of how more innovative players will make this a reality. He said there could be several ways melding the long-tail nature of such lines of business with investors’ needs including writing a mandatory commutation into the agreement or securing a reinsurance contract to cover liabilities after a certain period of time.

Despite this continual encroachment of alternative capacity, however, Kading remains optimistic of the industry’s ability to grow. He believes there are three areas traditional reinsurers will continue to enjoy growth.

The first is by increasingly taking on risks currently covered by various government and state schemes. Such schemes exist in many countries including the US, UK, France, Spain and Japan as well as several individual US states. “I believe these will increasingly move back into the private sector, partly because of the alternative capital and the extra capacity that creates,” Kading said.

Secondly, he believes emerging markets such as China and India have the potential to generate substantial growth. He notes that many parts of the Chinese economy, for example, is not covered by forms of insurance commonplace in the west such as commercial property. “This will change,” he said. “And when Chinese insurers start underwriting these risks more, they will need reinsurance.”

Finally, he stresses the many emerging risks that are developing in the world including cyber risk. “There are many opportunities for those companies willing to invest for the long haul,” he said.