24 October 2023ArticleAnalysis

The rise in demand for alternative solutions

The world of reinsurance is undergoing a significant transformation. As the financial landscape becomes more complex and the risks associated with global occurrences such as climate change and shifting demographics become increasingly unpredictable, the industry finds itself at a crossroads. This was never more evident than at the Guy Carpenter Symposium at October’s Reinsurance Congress in the picturesque city of Baden-Baden, Germany.

Dietmar Späth, the Lord Mayor of Baden-Baden, warmly greeted the attendees, underscoring the city’s pride in hosting over 3,000 reinsurance congress participants from 79 diverse nations, signifying the global scope of the gathering.

Laurent Rousseau, the chief executive of Europe, Middle East & Africa & Global Capital Solutions at Guy Carpenter, was pivotal in setting the day’s tone. He highlighted the capital trends affecting the industry, pinpointing the reduced appetite resulting from property-catastrophe losses. Crucially, he elucidated that this wasn’t due to capital deficiency but rather a contemplation on the strategies of deployment. Rousseau emphasised the role of catastrophe bonds, which now account for 38 percent of alternative capital, underscoring the industry’s evolving dynamics.

Thierry Léger, the chief executive of SCOR, took the dialogue further by spotlighting the growing demand for natural catastrophe covers. He discussed the dual challenge of increasing demand juxtaposed with declining traditional capacity. Léger’s insights, which covered the pressing concerns of climate risk, secondary perils, and the impact of global demographic shifts, accentuated the industry’s pressing need for innovative solutions.

Eveline Takken-Somers, representing PGGM, an independent asset manager and pension fund service, delved into the investment landscape. PGGM’s strategy, she shared, goes beyond mere financial returns. It is about diversifying their overall portfolio, aligning with the market trends that lean towards alternative solutions.

Lloyd’s of London’s chief financial officer, Burkhardt Keese, introduced a groundbreaking initiative: London Bridge 2. This plan aims to align investor needs with underwriting dynamics. Keese’s vision focuses on ensuring higher returns through diverse investments, ensuring adaptability in the evolving market.

Amid these discussions, the topic of captives emerged as a noteworthy solution to bridge the evident insurance gaps. Captives, essentially insurance companies set up to insure the risks of their parent companies, offer a promising avenue for risk management, especially in the face of a colossal insurance deficit marked by a staggering $100 billion for nat cat risks in the US in 2023. The role of captives, when combined with traditional reinsurance and alternative capital solutions, presents a holistic approach to tackling the industry’s challenges.

The industry’s challenges weren’t glossed over. The opacity surrounding the underwriting process emerged as a genuine concern. This enigmatic aspect has often deterred investors. Yet, hints dropped by panellists indicated that transformative technologies, such as parametric underwriting and artificial intelligence, might hold the key. These innovations could offer much-needed transparency to underwriting, appealing to a broader base of investors.

In conclusion, the symposium was a testament to the industry’s resilience and adaptability. While challenges are present, so are a plethora of solutions, ranging from traditional practices to avant-garde approaches. By amalgamating these, and by fostering a deeper understanding between existing reinsurance processes and capital market demands, the industry is setting itself on a trajectory of sustained growth and innovation.

Marcus Schmalbach is the chief executive of Ryskex. He can be contacted at: schmalbach@ryskex.com