The buzz around Monte Carlo this year is all about what some have called a ‘once in a generation’ hard market. But Vincent Foucart, CEO of Scor P&C Solutions, takes a more measured view.
“For me this is a necessary technical adjustment that’s taking place: it’s not a ‘once in a lifetime’ event. Risk professionals across the market understand that the reinsurance part of the risk-transfer chain has not earned its cost of capital for half a decade,” he says.
“If people want a reinsurance market that fulfils its role as a reliable shock-absorber and capital provider, reinsurers have to earn their cost of capital, plus their management expense at least, otherwise their shareholders will withdraw their capital.”
Foucart believes the market is in a period of adjustment towards a new normal made necessary by a riskier world: climate change, social inflation and geopolitical risks are here to stay, he says.
“The new risk environment calls for a discussion between risk carriers that is about more than price, with reinsurance programme structures, terms and conditions, and available capacity all under review.”
As a result, in order to optimise risk-financing and capital relief, cedants are naturally looking more closely into what alternative solutions and, specifically, structured reinsurance can offer them.
“We’ve experienced a surge in structured quote requests because buyers want to test available options: surplus relief proportional reinsurance or aggregate XL using the traditional method of mutualising risk over years – plus incorporating a structured way of doing it.”
Structured reinsurance is essentially a tool for capital and volatility management, Foucart explains.
A typical capital management case would be where a cedant’s business is impacted too heavily by one line – the weight of motor third-party liability, for example, creating an imbalance in their solvency risk assessment. In such a case the group internal model of a well diversified reinsurer would be a more efficient answer than the standard formula of a direct carrier.
In terms of volatility management, a multi-line/multi-year structure makes it possible for cedants to achieve a balance between risk transfer and risk financing, whereby the financing mechanism is defined by funding premium; similarly, loss participation schemes can be introduced into reinsurance treaties.
But structured solutions are not intended to help cedants circumvent the technical adjustments that are so necessary in the traditional reinsurance programme, Foucart adds.
“A lot of reinsurers have adjusted the attachment point of their programmes upwards. And this is happening on the corporate [insurance] side, primary insurance and retrocession side. So everyone is looking for ways to manage their retention,” he explains.
“The alternative solution expert won’t be any more willing than their ‘traditional’ counterpart to come up with a quote that is not economically viable. At Scor, we want to help our clients manage their retentions and regulatory capital requirements – but we do not put traditional and alternative in competition with one another.”
The reduction in available traditional reinsurance capacity has inevitably brought ILS back into the alternative solutions picture, albeit with a more cautious approach from investors.
“The collateralised segment of ILS especially expanded dramatically over recent years. But recently, after taking losses, investors have re-allocated somewhat and also rebalanced, with a partial return to the cat bond segment,” Foucart says.
With an adjustment to its weight and position in a typical programme that takes account of investors’ returning appetite, ILS does have a bright future, Foucart concludes.
In the wider world of risk-financing solutions, Foucart doesn’t envisage big changes to regulation or supervisor “sentiment” that could be an obstacle to cedants exploring alternative methods. “Compared with 20 years ago and the rise of financial reinsurance, the industry today is very disciplined in terms of satisfying real risk transfer tests,” Foucart stresses.
