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Capital efficiency strategies drive alternative capital interest: GC Securities

30th January 2018 - Author: Luke Gallin

The collateralized reinsurance and retrocession markets continue to expand despite the impacts of 2017 catastrophe events, as capital management and capital efficiency strategies drive interest in insurance-linked securities’ (ILS) mechanisms, according to GC securities, the capital markets and ILS arm of reinsurance broker Guy Carpenter.

Guy Carpenter logoIn a discussion with Reinsurance News around the January 1st, 2018 renewals season, GC Securities’ Managing Director and Global Head of ILS Origination and Structuring, Cory Anger and Chi Hum, Managing Director, GC Securities, provided some insight into the performance of the collateralized reinsurance and retrocession markets.

The collateralized reinsurance market has become the largest sub-sector of the ILS space, in front of the ever-expanding catastrophe bond market and the retrocession arena, a trend that continued during the January 2018 renewals season.

“The growth of collateralized reinsurance activity has begun to outpace the bond market as the investors look to participate directly in reinsurance programs through rated fronting companies or their own entities. Overall, collateralized reinsurance and sidecars provide approximately USD 50 billion of capacity as of January 1. There is still plenty of traditional capacity so there can be challenges in replacing incumbents, and increased protection purchases were limited,” said Hum.

The collateralized reinsurance product is still the most comparable with traditional reinsurance, effectively being a fully-collateralized layer of a normal reinsurance program. This means it’s the easiest to complete, and the simplest for a ceding company to understand and perhaps the most efficient in terms of price, given the lower effort required to get transactions completed.

“Sidecar and quota share activity also continues to grow by sourcing capital from investment funds and pension funds directly. Whereas quota shares had historically been a hard market phenomenon, current interest is driven by capital management and capital efficiency strategies, migrating the business model towards that of an asset management or Managing General Agency strategy,” continued Hum.

Anger, added; “We do not see any material changes in the coverage type or perils targeted by ILS investors participating on a collateralized reinsurance basis. They continue to focus on property catastrophe risks and, as in prior years, expand participation on such programs.”

In the aftermath of hurricanes Harvey, Irma and Maria, renewals discussion often focused on the retrocession market, amidst fears of a capacity crunch after a substantial volume of collateralized capacity was trapped or lost in advance of the contract negotiations.

However, the majority of ILS participants replenished lost and trapped collateral, and a number of traditional reinsurance markets returned to the retro space for the first time in a few years, and this continued, global interest in the marketplace was highlighted by Hum.

“The global investor appetite remains strong. Hurricanes Harvey, Irma and Maria temporarily gave pause to the capital markets dedicating capacity to the retrocession market, but they quickly regained footing with successful rounds of new capital raises. The reinsurers will likely continue to participate if the capital markets retrocession pricing continues to be attractive,” said Hum.

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