Reinsurers can benefit from market dislocation
Dislocation in the market offers opportunities for re/insurers, but it requires courage and foresight to come out ahead.
That is the opinion of Kathleen Faries, chief executive officer at Tokio Solution Management, speaking to Intelligent Insurer.
Faries said that while numerous questions accompany the changing market in which reinsurance is transacted, there are opportunities to be sought for those that are willing to evolve.
“One thing is clear: the industry is being forced to transform,” she said. “As a result, traditional reinsurance carriers are facing a choice: whether to be part of the evolution or find themselves on the endangered species list.”
Faries added that as the growing presence of third-party capital presided yet again over the recent renewal season, traditional reinsurers responded by further absorbing third party capital as part of their underwriting operations and into their value propositions to provide a more efficient and attractive offering to their clients.
“The traditional markets that survive this industry evolution will need to demonstrate the ability to transform their operating platforms, reduce expenses, and find a way to manage capital more efficiently,” she said.
“Reinsurers need to become leaner, more focused organisations if they are to compete and survive. Despite giving up some margin, reinsurers who adapt their business models to actively partner with third party capital will benefit from revenue diversification and increase shareholder value through more stable returns.”
Susan Lane, senior vice president, head of business development and client services at Tokio Solution Management, added that the burden of regulatory costs will continue to make it challenging for traditional rated reinsurers to compete effectively.
“Such reinsurers are subject to considerable regulatory requirements. While the operations of third party capital and insurance-linked securities (ILS) managers are not immune from regulatory compliance (AIFMD, Dodd Frank, FATCA, etc), they are able to leverage operational expense efficiencies when deploying capital,” she said.
Both Faries and Lane pointed out that another response to the market dislocation is evidenced by the 2014 growth in merger and acquisition activity.
“Traditional markets are combining their franchises to become more relevant to clients and gain economies of scale,” said Faries. “Although the merging entities often point to these potential benefits, the actual execution and delivery of a more efficient business model has proved challenging for most so far.”
The pair also commented on the continued interest in the hedge fund-backed reinsurer strategy to provide enhanced returns over a more traditional reinsurance underwriting and investment strategy.
“However, the current competitive market conditions have raised questions about the viability of this model, and rating agencies appear more cautious and measured in their review and approval process of such entities. This has resulted in parties considering new formations to re-evaluate their strategies,” said Lane.
“Additionally, the commitment from the US Internal Revenue Service to release guidance and regulations related to the hedge fund reinsurance strategy by early May 2015, at the request of the Senate Finance Committee, is being closely observed by the market and may have an impact on future growth in this area.”
To read the full article on the Intelligent Insurer website, click here.
