Lloyd’s Tolle Discusses Reinsurance Securitization Growth

September 22, 2006

A bulletin on the Lloyd’s Website (www.lloyds.com) gives highlights from a recent conference, held at the Reinsurance Rendezvous in Monte Carlo, on the continuing development and “convergence of traditional reinsurance solutions and alternative capital market solutions.”

Lloyd’s explained that the “alternatives to the traditional reinsurance model have risen in popularity as a result of the shortage in reinsurance capacity brought about by the recalibration of thinking regarding the frequency and severity of US Windstorm events following Hurricanes Rita, Katrina and Wilma in 2005.”

The reaction has promoted the use of sidecars – investment vehicles that are tied to a renisurer’s designated risk portfolio and are usually funded mainly by independent investors. Lloyd’s noted that their use supplements “an insurer’s ability to offer catastrophe capacity over and above their own ‘risk appetite’. A number of representatives from hedge funds and private equity companies were keen to discuss what they had to offer at the event.”

Lloyd’s also indicated that “brokers were warning that insurers would look to other options if traditional reinsurers maintained their stance that prices had to rise further in the run up to renewals at January 1, 2007.” But the article also expressed the opinion that these alternative vehicles “are here to stay.”

Speaking at the seminar, Rolf Tolle, Franchise Performance Director at Lloyd’s, stated: “I think we’re all agreed that 2004 to 2005 could not be described as ‘sweet years’, and hurricanes Katrina et al showed that there is a limit to the availability of traditional reinsurance. This raised questions as to how it can fully address the changing needs of its customers.”

Another speaker, Mike Millette, managing director, Goldman Sachs’ Risk Markets, claimed that the appetite for catastrophe securities, including catastrophe bonds and sidecars, was likely to grow over the next 18 months to constitute about ten per cent of primary reinsurance coverage and 50 per cent of retrocessional coverage. He said this would amount to $20 billion by the first quarter of 2008.

Nonetheless these “contingent capital products still represent only a small percentage of the overall Property & Casualty reinsurance industry.” Tolle added that “traditional reinsurance markets still dominate, and we should be aware that these new products are not designed to be an add-on or a replacement for traditional reinsurance which will always be the foundation.”

He also expressed confidence in the Lloyd’s market, and added that it “remained committed to a long term view and was seeking ‘robust strategic plans from our syndicates that recognize the need to balance growth with the pressures of a cyclical business’.” He sees traditional reinsurance products as compatible with the newer alternatives, as both serve “to provide options for clients that meet their complex needs. If you put yourself in the place of the customer and think strategically, then given recent events you will not want to place all your eggs in a single basket of traditional reinsurance,” he explained. “You need to understand the range of solutions which are available to you. You can then make informed decisions which best suit your level of risk exposure, and your view on the sensible cost of mitigating or transferring risk.”

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