Monte Carlo, Mutuals and More Capital

Monte Carlo, Mutuals and More Capital

This article first appeared on the Willis Towers Watson Wire inSeptember 2013

The beginning of the month saw the annual Rendez-Vous De Septembre reinsurance gathering, traditionally the first major event of the reinsurance conference season that will see regular meetings of the reinsurance market between now and the 1st January, in locations as far apart as Baden-BadenBeijing and Seattle.

Each year since 1957, senior management from brokers, insurers and reinsurers around the world have gathered in the Principality of Monaco, considered by many as neutral territory in the commercial clashes of the reinsurance market, as it has no indigenous insurance or reinsurance industry. This year discussions were dominated by one subject: what impact is the influx of new capital into the reinsurance sector having?

New Capital in the Industry

Our figures indicate that up to $100 billion of third party capital could possibly enter the industry within the next few years. John Cavanagh, CEO of Willis Re, recently commented that such an influx would have a number of profound consequences. This is because as third party capital enters the property cat reinsurance market, it is going to crowd out conventional equity capital. After all, that equity capital has to go somewhere. More detail is given in our press release here.

In Monte Carlo, or elsewhere, it would be hard to find an industry professional who denies that this new capital is having an impact, but the debate about what that effect is and what it means for the future of the reinsurance markets rages on long after the closing events of the conference and the industry professionals have dispersed back to their home countries.

Potential Benefits

What is clear to us is that this is good news for Mutuals. Mutual insurers have a unique ownership structure where policyholders, not external shareholders, are the ultimate owners. This means they have less access to other forms of capital, and as a result, mutual insurers are often heavily reliant on reinsurance to provide them with additional capital to deal with catastrophes and large losses.

However, benefits are readily apparent; for example the cost of property catastrophe reinsurance is falling, and well-managed renewal negotiations have the potential to make this an immediate and easily quantifiable benefit.

Increasing competition amongst reinsurers also provides incentives for them to be more flexible about contract conditions; this provides a valuable opportunity for a mutual to incorporate the flexibility within their reinsurance arrangements to address the coverage needs of members, and close any gaps that have arisen between the reinsurance and original policies.

Less tangible are the benefits of greater choice: today there is a wider and ever increasing range of reinsurance providers available. Within this vibrant reinsurance market it may well be easier to find reinsurance partners who recognise the unique characteristics of Mutuals, and give credit for them.

As the 1/1 renewal season approaches, we will certainly be pointing out to our Mutual clients that now is the time to try to benefit from these changes, and reminding reinsurers that they should consider and treat Mutuals as preferred customers.

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