The Awbury Team presented last week at both the Insurance Day 2015 Bermuda Summit and the Bermuda Captive Conference. We discussed our E-CAT capabilities and the fact that so-called “alternative capital” is really not so “alternative” now; and is not going to disappear. All those active in the (re)insurance markets had better learn to adapt and innovate, or they will run the risk of becoming simply “price-takers”, doomed to trying to earn an acceptable return on capital.
And bear in mind that refugees or insurgents often displace the established order- consider Rome, Venice and the United States- so the advent of new money in the guise of “alternative capital” may create such a turning point.
Nevertheless, current industry sentiment (which tends to combine angst within an element of existential fear) strikes us as both misguided and self-defeating. The need for (re)insurance in an increasingly complex and inter-connected world is not going to go away. Clients still need to protect themselves against risk; and there remain not only many underserved markets, but also risk categories where the potential and the parameters are still to be defined. And on the investment side, the curse of a low return environment in fixed income, means that generating anything remotely reasonable in sustainable terms is also very challenging. One can only “harvest” capital gains on one’s existing bond portfolio once! Reinsurance may be suffering from a surfeit of capital, but that seems to us to stem more from a “framing” issue stemming from a continuing focus on the traditional areas, such as NatCAT, instead of developing and pursuing new markets in product and geographical terms.
In our view, the real question that an (re)insurance executive should pose is: “Where should and can I allocate my capital so that I achieve the best risk adjusted returns; maintain pricing power; face low competition; and have negotiating leverage?” Naturally, anyone should respond: “But that is a statement of the ******** obvious!”- and indeed it is. However, it is remains a fact that many (re)insurers still seem to struggle with executing on that axiom, even while consolidation increases and the new mantra becomes “diversification”.
So, what to do? What if we have the capital, but not the expertise?
Successful companies spend a great deal of time and money building infrastructure and acquiring expertise in their areas of focus; but run the risk of finding themselves burdened by sunk costs and “stranded assets”. Yet, “betting the firm” on building everything de novo, when one is not sure that an opportunity or market is sustainable, is also somewhat risky.
Fortunately, there is a third way; which is to partner allocators of capital (reinsurers) with subject matter experts who have the required presence in areas of new opportunity. In fact, the (re)insurance industry already has a tried and tested “virtual model” in the form of MGAs/MGUs and lead (re)insurers, which gives ready access to origination and expertise in areas that are promising, but without having to disrupt what may well be a complex and interdependent corporate structure.
So: “If there’s somethin’ strange in your neighborhood
Who ya gonna call?”
– The Awbury Team