Reinsurance Panel: The Next Wave of Reinsurance Capital Will Be Virtual, With Start-Ups in New Places

Should there be a market turn, the new capital attracted will likely continue to come in virtual form, with investors launching start-up reinsurers in emerging domiciles, a panel of reinsurance experts said. The discussion was part of a webinar titled “State of the Global Reinsurance Markets,” sponsored by the A.M. Best Co. Video replay of the webinar is available at http://www.ambest.com/reinsurance10.

"We’ve seen Zurich grow [based on] the number of reinsurers who have set up in Zurich or redomiciled from other locations. We’re at 25, 30 reinsurers in Zurich," Stephen Hitchcock, managing director of Lockton Re, said. "That begs the question: If we have a class of 2011, 12, 13, where will that be set up? Would that be set up in Bermuda? Would that be set up in Zurich or somewhere else?" Hitchcock also pointed to Singapore as a developing reinsurance hub that will likely be fueled by continued insurance growth in China and India.

As markets contracted in the early decade and after the Katrina hurricane, new capital poured in via new reinsurance and specialty insurers domiciled in Bermuda and elsewhere. Guy Carpenter Managing Director Chris Klein, its director of reinsurance market management, said the days of forming new reinsurers following market contractions may have peaked.

"That assumes there will be a class of 2011. I’m not convinced that will be the response after the next comparable big market-changing event," Klein said. "I think capital will come in. We’ve now gotten excellent experience with sidecars and other types of vehicles which provide all sorts of advantages for investors, particularly those with a shorter term horizon." Reinsurance sidecars are special financial structures focused on risks written by reinsurers or insurers that allow investors to take on the risk and return of a group of policies.

"Somebody coined the term 'disposable reinsurer' when sidecars started forming after Katrina. It really served a very valuable purpose. It gave investors a very good return on their investment," said Robert DeRose, a vice president at A.M. Best who follows the reinsurance industry. "I don’t think we’re going to see start-ups to the degree that we have in the past. I think capital is going to come in in a more temporary way."

"A sidecar, in our view, is a hard market vehicle -- no pun intended -- to add capacity when capacity is low," said Brian Ingle, executive vice president at Willis Re. "So the sidecar activity this year, which is minimal at best, seems appropriate to where we are in the market cycle. That’s our view. On the ILS [Insurance-Linked Securities] side, we think it’s been a pretty active year in terms of issuance. I think $2.4 billion of issuance has taken place so far this year, and that puts it on par with 2007."

"One of the most interesting trends is that insurance companies themselves are accessing the market through bankers like ourselves," said Bryon Ehrhart, chairman of Aon Benfield's analytics and investment banking teams. "We really thought reinsurers would more often accumulate this capacity and deploy it in the customary, traditional reinsurance form. Eight out of 10 transactions this year have been done by original cedents rather than reinsurers capturing what really has been very cheap retrocession cover."

(By: Lee McDonald: [email protected])