Third party capital prompts creativity

The soft market will continue into 2015 unless a big catastrophe loss occurs in the final quarter of 2014, David Flandro, global head of strategic advisory at JLT Re, told Baden-Baden Today. But more interesting questions exist—not around pricing but potential structural changes in the sector, he said.

These relate both to the influence of the third party capital that is entering the market and to some different terms and conditions that are increasingly being used.

Flandro also notes that the type of third party capital entering the market has changed compared with two and three years ago, and it is being used in different ways.

“The continuing argument is about whether it is hot money or long-term money. We think it’s a bit of both,” he said.

“People are also asking how long it will keep coming in, how will it affect the sector, what happens if there is an interest rate spike, and what happens if there is a really big series of catastrophes.

“Those are all interesting questions but the really pertinent one for us and our clients is: how can this capital be used in an environment where prices are coming down and other forms of capital might be getting more expensive?”

Flandro noted that, partly driven by these structural changes within the market, there is also a general increase in creativity as insurers and reinsurers strive to find ways to utilise and deploy the excess capital.

Private placement catastrophe bonds, for instance, are proving an attractive bespoke solution for smaller and medium-sized transactions, “as opposed to the 144A route”, and there are attempts to securitise non-property cat risks.

“Clients have asked about the securitisation of whole account quota shares for example,” he said. “If you’ve got a lot of capital that wants to get into the market, why not find ways to deploy it? That’s what people are asking.

“If you’re an insurance company and your equity investors have just had five straight years of 16 percent average annual returns in the equity market, they’re going to be getting a bit more demanding with you.

“If you’re retaining a lot of capital and premium, one way to gear up is to give some of that capital back and to make additional, strategic reinsurance purchases. You can do that more creatively now because the capacity is more willing.”