10 June 2015Actuarial & underwriting

New business line born from convergence

The growing convergence between the risk-transfer industry and the global capital markets has led to a new class of business emerging.

E-CAT, the coverage of complex economic and financial risks, could offer growth and diversification for reinsurers and much needed protection for large companies and institutions.

That was the view put forward by panellists speaking at a session on this topic at the Bermuda Captive Conference held in Bermuda this week (Monday June 8 to Wednesday June 10).

Jonathan Young, the chief executive of Boston Re, gave an initial overview of how convergence has played out, boosted by the dearth of capacity and hard rates in 2005 following big hurricane losses and the financial crisis of 2007/08, which made the reinsurance sector even more attractive to capital markets investors.

Alex Dubitsky, chief executive of Awbury Insurance, went on to explain that the reality is that it is virtually impossible to predict economic crises and that, despite the best efforts of regulators, some sort of crisis occurs every five to ten years.

“This means that the challenge is not to try to anticipate what is coming, as that is impossible, but to ensure you are constantly responding and fully engaged in dealing with challenges that exist by using the tools available now. The crisis will come but if you have the right tools in the tool box it will help you address the crisis,” Dubitsky said.

He explained that E-CAT can be used to hedge these large financial and economic risks. Each deal is structured in a bespoke manner and deals tend to be very large and unique, he said. But the product offers a new revenue stream for large reinsurers and a risk mitigation tool for clients.

“These are usually very large and complex deals encompassing multiple reinsurers,” he said. “Each is customised to the client; these are not commoditised.

“But it is in the blood of the insurance industry to cover economic risks in this way – that is how Lloyd’s of London started covering risks in the shipping industry. E-CAT can help anywhere there are large and complex financial risks.”

Given the size of the financial markets, he described this as a significant opportunity for the industry. He said many big reinsurers are already involved and other reinsurers should consider it and can make money from it if they have excess capital, excess risk capacity or un-utilised risk capacity.

“But it is not an easy business,” he said. “Each solution is unique and highly bespoke, each deal is individually negotiated and executed which can be time consuming, and the reality is that these deals often mean stepping outside of the comfort zone.”