Donny Tong of Truist explains what could be on the horizon as the hard market continues to offer opportunities.
Within Truist’s Reinsurance Collateral Trust team, we see potential opportunities from our peers as other trust and custody service providers consolidate or restructure their business. We are one of the few large banks that cater to the captive insurance and reinsurance trust and custody market with a dedicated team and many of our clients appreciate the bank’s strong credit rating and commitment to this market.
We have seen some smaller banks opportunistically enter into the trust and custody service provider space in the last 12 months, but due to certain regulatory requirements (eg, bank size and bank credit rating), we expect to see the larger opportunities gravitate towards well established trust providers with high credit rating.
We believe there is more growth potential in the captive and reinsurance sector due to the availability of risk transfer, hardening of the market, rising claims cost and tax efficiencies. The last couple of years have shown companies have been resilient in managing a challenging insurance environment.
Captive insurance premiums have increased year over year even after facing a global COVID-19 pandemic, increased frequency and severity of natural disasters, and increased labour and material costs. These contributing factors aren’t short term, and we believe there will be more interest and growth in the captive market to face these long-term issues.
At Truist Bank, we believe our offering is unique because we’re one of the few large banks that have a dedicated insurance collateral trust team that services the captive and reinsurance collateral market. We pride ourselves in understanding our clients’ businesses and the dynamic of how a collateral trust can help a client post collateral in lieu of a letter of credit. Our clients appreciate the fact that Truist Bank is a pre-approved trust service provider for many insurers. This allows the onboarding and account establishment to be a very streamlined process while lowering the upfront set up costs.
The hard market will continue throughout the remainder of 2022 and into 2023, in our view. There are two major driving factors contributing to the hard market: the rising cost of labour and material and the increased frequency and severity of catastrophic natural disasters. It’s no surprise rates will continue to increase as insurers are seeing higher claims cost due to these two factors.
On a side note, there are some new entrants entering the market trying to capitalise on the hard market. I believe these new entrants will provide some relief in capacity and rates as they compete with legacy insurers.
The main challenge we see ahead for the captive and reinsurance market is the rising rate environment. Due to the current inflation and rising rate environment, we are seeing many clients grappling with unrealised losses with fixed income portfolios. Most investment portfolios must adhere to regulatory investment criteria and as a result invest in highly rated and liquid securities (ie, fixed income rated A or higher). Unfortunately, there are no overnight fixes as rates are rising, the bond prices react inversely causing unrealised losses. We don’t anticipate any rate relief until 2023.
The secret to our success is having a talented team, relationship building and gaining the trust of our clients. Our insurance collateral trust team comprises professionals who have administered and managed captive and reinsurance trust/custody accounts with an average industry experience of 15 years. We strive to ensure our clients are treated with respect and transparency. As we build our relationship with our clients, we are establishing a level of trust by being transparent.
My advice to the next generation of trust and custodial service providers is to communicate and genuinely know your clients. These two things may seem simple, but communication and knowing and understanding your client are key to building a fruitful relationship.
More importantly, don’t be afraid to pick up the phone and call a client—even if it’s bad news. In many instances, a phone call is more effective than sending an email. As for knowing your client, the more you understand their business, the better you’ll be able to serve them.
market, trust, captive, reinsurance, collateral, insurance, rating