Alternative Forms of Capital Shift the P&C Reinsurance Landscape: Towers Watson

Softening P&C reinsurance market being driven, in part, by accelerating alternative vehicles

New York, NY (Mar. 17, 2014) – Over half (55%) of property & casualty (P&C) insurance chief financial officers (CFOs) believe the property reinsurance market is softer than the primary market, while more than one-third (34%) deem that the same is true for casualty business. CFOs attribute this softness primarily to the significant growth of insurance-linked securities and other alternative forms of reinsurance capital, according to a new survey by global professional services company Towers Watson.

The survey examined trends in the P&C reinsurance market, as well as drivers and consequences of current market conditions. While nearly all respondents (97%) utilize traditional reinsurance, most insurers are not currently using alternative forms of capital to protect their business. About three-fifths (59%) are either purchasing reinsurance through a collateralized reinsurer or are likely to consider such a purchase. Twenty-seven percent are currently using, or look favorably on the use of, both insurance-linked securities, such as catastrophe bonds, and hedge fund-owned reinsurers.

“The opportunities in the risk transfer market are just starting to be realized. Many fresh sources of capital are seeking investments that are uncorrelated to their existing investment holdings,” said Stuart Hayes, senior consultant, Towers Watson. “With risk transfer arrangements continuing to evolve, we anticipate P&C insurers hastening their participation in various structures across the risk transfer spectrum, thus complementing their traditional reinsurance programs.”

The survey assessed the impact alternative capital is having on the reinsurance market, and the advantages and disadvantages in using alternative reinsurance vehicles. Ninety percent of respondents indicated they have seen or expect to see decreasing prices due to alternative forms of reinsurance. Eighty-eight percent said the lower cost of capital afforded by alternative reinsurance options is their top benefit. When focusing on the limitations of alternative vehicles, over two-thirds (69%) cited complexity of the contract or deal structure, and 62% named ambiguity related to contract triggers.

Despite the threat of overcapacity in a softening market, less than a quarter believe there is a need for consolidation among reinsurance companies (21%) or that consolidation will take place in the next two years (24%). However, more than half (52%) feel that prolonged soft market conditions could drive reinsurance market consolidation in the future, while competing alternative capital sources were cited by nearly half (48%) as possibly having the same effect.

“Reinsurers need to be aware of the near-term realities of a relatively soft reinsurance market and the longer-term potential of the alternative risk transfer market,” said Matthew Ball, director, Towers Watson. “Given the increase in reinsurance and alternative capital supply, reinsurers are faced with a property catastrophe market that is likely to soften unless there are major catastrophic events with very large losses. Reinsurers may face a classic economic example of reduced demand and increased supply that drives prices lower.”

Purchasing Decisions

Over three-quarters of respondents revealed that their enterprise risk management (ERM) processes haven’t changed reinsurance purchasing across various structures, with the exception of catastrophe reinsurance, where nearly one-third (31%) said ERM has prompted them to buy significantly or somewhat more coverage. According to Hayes, this purchasing trend could change: “ERM programs are becoming more sophisticated, helping insurers gain an even better understanding of previously hidden risks. The resulting analyses should change reinsurance purchasing decisions.”

Forthcoming regulatory and accounting changes won’t likely change insurers’ current ceded reinsurance structures. Only 10% indicated they’re likely to make changes that accommodate the new requirements, such as the Own Risk and Solvency Assessment regulations, International Financial Reporting Standards, and proposals issued by the International Accounting Standards Board and the U.S. Financial Accounting Standards Board.

However, more insurers anticipate increased industry use of reinsurance, and/or its different structures, as a result of pending regulatory and accounting changes. Nearly half (48%) expect the use of catastrophe reinsurance, aggregate loss covers (38%) and quota share structures (31%) to increase, while less than 15% foresee decreased use of aggregate loss covers and aggregate risk transfer structures. Hayes added, “Once these pending changes take effect and their impact on capital requirements are better understood, more significant changes in reinsurance purchasing decisions might occur.”

“The new market realities are requiring the reinsurance market to adapt and operate more efficiently. Reinsurers that realize the efficacies of alternative capital, while maintaining the relationships and platforms already built around traditional reinsurance solutions, will distinguish themselves by providing primary P&C insurers the best risk transfer solutions,” said Ball.

About Quarterly Deal Performance Monitor

Towers Watson’s sixth North American P&C CFO Survey included 29 CFO participants, distributed relatively evenly among commercial lines (31%), personal and commercial insurance (24%), and P&C insurance and reinsurance (21%), as well as between stock (48%) and mutual (42%) companies. Thirty-eight percent have core operations in the U.S.; 17% operate locally, and 14% are multinational/global. The largest number had total direct written 2012 P&C insurance premiums between $100 million and $500 million (39%), and 11% had 2012 premiums of over $5 billion.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management. Towers Watson has more than 14,000 associates around the world and is located on the web at