11 September 2016 News

Reinsurance funds should standardise reporting

Inconsistencies in the way reinsurance funds are reporting their estimated performance to investors and even selling themselves to new potential capital are becoming increasingly problematic for the industry and should be standardised, Darren Redhead, chief executive of Kinesis Capital Management, told Monte Carlo Today.

Redhead said that Kinesis, a fund offering collateralised reinsurance which was formed and capitalised by Lancashire Holdings in 2013, has always been transparent and realistic in what it tells investors.

It reports its long-term expected returns after losses and fees, for instance, which take into account average levels of loss activity during any predetermined timeframe, and also after the impact of any potential trapped funds and delays of repayment, which is unique in the market.

But, Redhead claimed, some funds do things differently, which can confuse and mislead investors. Others are opaque in terms of what they invest in.

“I am not saying there is a right or wrong way of doing it but there are inconsistencies and that can become a problem for investors,” he said. “There is no standard way of doing it. Some funds report their return without taking expected losses into account. We list every deal we do, including the pricing and expected loss to be fully transparent to our investors.”

He noted that an average return for many funds and companies in recent years would easily move into losses if catastrophe losses hit normal levels.

Redhead also believes that many funds do not reveal the extent to which investors’ capital is leveraged. While this can enhance returns, it can also cause problems in the event of multiple losses—something that should hopefully not be a surprise to investors or customers.

These concerns around the way funds report their performance come against a healthy backdrop for the collateralised reinsurance sector, however. Redhead said that as many buyers have reached the limit of how much collateralised coverage they want on their programmes, the capital is finding a route into the industry in other ways.

“We used to think there was a ceiling on how much capacity customers would want but the industry is increasingly putting this money to work in other ways,” he said. “The old-fashioned term for it is fronting, but more reinsurers are effectively using their own paper with this capital in the background.”

He estimates that, taking such arrangements are taking into account, the size of the market will likely grow to close to $100 billion in the next two years, from a current estimated level of $75 billion.

“The barriers to entry are coming down all the time so it is naturally taking a bigger and bigger share in the industry,” he said. “Third party capital is here to stay and people are using it.”

Redhead admits that a question does exist over how much of this capital will react in the aftermath of a big loss. But he believes that, while some investors may exit the industry, there will probably be even more ready to replace them.

“That could curtail any upturn in pricing,” he said. “The question is how much will leave and how much will come in. But while investment conditions in the wider world remain as challenging as they are, there will remain a lot of money keen to move into this space.”

He added that, for this reason, it is hard to see an end to the soft market in sight. While rate reductions are slowing and the market seems to be “bumping along the bottom” he admits it is difficult to imagine what sort of event would change things quickly.

“A few big events would put some players into loss-making territory but I am not sure the change would be quick. Any increases would quickly be curtailed,” he concluded.

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