The Intelligent Quarterly from the publishers of The Insurance Insider

Spring 2012

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The alternative (re)insurance sector must innovate to compete with traditional players as the two markets encroach on each other's territory, according to speakers at the annual Trading Risk New York conference this autumn.

Nearly 200 delegates gathered for a day of panel discussions and presentations delivered by luminaries of the community, which was followed by a networking dinner.

Aon Benfield Securities president Paul Schultz told the audience that the market needs to tailor its products to sponsors' interests rather than expecting them to change their buying behaviour.

In many cases that might come down to offering indemnity-type products, Schultz said.

In 2007, some 60 percent of cat bond issues were on an indemnity basis, thereby mirroring the ultimate net loss capacity offered by traditional reinsurers.

Investors' concerns about supporting these transactions meant less than half of such issuance in 2009-10 had indemnity triggers.

Insurance-linked securities (ILS) capacity leans towards index-linked or parametric triggers, which results in an insured party retaining basis risk on its books. But ILS does offer multi-year and collateralised capacity.

However, the traditional markets are encroaching on one of these selling points by starting to offer multi-year capacity deals, Schultz noted.

Swiss Re Capital Markets director Judy Klugman told delegates that the ILS community needed to reassure buyers' fears about basis risk.

A "quantum leap" within the market could occur with greater use of "warehouse institutions" such as Swiss Re, to enable sponsors to lay off the basis risk that remains following a securitisation of their exposures.

ILS is still largely seen as a margin product against the "800lb gorilla" of traditional reinsurance, remarked Paul Schultz.

But Michael Millette, head of structured finance at Goldman Sachs, challenged conventional wisdom by telling the audience that reinsurance capacity supplied by the capital markets was actually quite significant.

Millette estimated there was around $12.5bn of capital from Bermuda, Lloyd's and European reinsurers competing directly with capital markets participants within the $200bn of publicly traded capital supporting (re)insurers that underwrite US-exposed perils.

On this basis, the $25bn-$30bn of capital that makes up the Trading Risk universe plays a far more significant role in the P&C sector than its proportion of the industry's overall capital would suggest, he explained.