This year’s Rendez Vous Reinsurance Conference was different to the conference of previous years. There were two main reasons: it seemed quieter than before (one of my favourite restaurants was so quiet, I wondered if it was closing down); and most of the discussions were about alternative capital in the reinsurance sector, instead of rates and cycles.
I was reminded of this yesterday, when I read Julian Adams’ speech to the Insurance Institute of London (*). Although Adams touched on forward-looking supervision, Solvency II and the PRA’s early warning indicators, like most of the Conference delegates, his main focus was on the growth of alternative capital in the reinsurance market. In particular, Adams used his speech to list the questions UK supervisors will be putting to firms in the coming months. And those questions include:
- What impact will the growth of alternative capital in the global reinsurance market have on your firm’s business lines, business model and business strategy? Will it create pricing pressure that forces you to focus on new lines, or lines where risks are less well modelled? If it does, will it affect your diversification levels and capital modelling assumptions? What impact will these things have on your risk profile, and risk tolerance levels?
- What assumptions are you making about the lines that will be more or less affected by these trends? Do you think alternative capital will always be concentrated in the higher layers of North American property cat; or will it move into the lower layers, and other lines of business?
- Will these trends affect the returns on your traditional underwriting activities? (Alternative capital providers often have a lower cost of capital than traditional (re)insurers);
- Do you need your own capital markets division, or your own vehicle to attract and manage capital from other investors? This might help you to preserve your strategic options, but would it change the dynamics of your business? How will you manage the transition and ensure that your incentive structures are properly aligned with the underwriting of risk?
- How well do you understand the terms and conditions attached to the alternative capital and alternative capital structures you’re proposing to accept and use? How much risk will you accept and transfer? How will losses be traced through the programme?
- Are you sure cover will respond in all of the circumstances you expect? Are there any circumstances in which the collateral will be insufficient, or withdrawn?
- If you delegate underwriting decisions to others, remember that you’ll be expected to continue to manage and monitor the underwriting activity, and the aggregate risks to which you are exposed. “It is also important that all those individuals who make decisions affecting UK insurers are captured by [the PRA’s] approved persons regime”;
- If you’re looking to reduce your cost base, what additional risks might that pose?
The PRA doesn’t currently see a case for regulatory intervention in this area. It’s merely flagging the questions it thinks current trends generate. It’s also making it clear that it will be putting these questions to firms, and expecting them to have the answers. That, at least, is useful. Unfortunately, there is one other question that Adams didn’t raise, and on which it would be helpful to have his answer: does the Alternative Investment Fund Managers Directive (AIFMD) apply to those who manage alternative capital in the reinsurance sector, especially where that capital’s held in a separate vehicle? Alternative capital providers and managers are asking this question, and their lawyers are giving them advice. At least as far as I’m aware, the PRA and ESMA are still to offer a view.