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Risk in Context

Make Way: Alternative Capital Could Be a Better Fit for Your Risks

Posted by Duncan Ellis April 26, 2017

Pension funds, sovereign wealth funds, and others have earmarked an estimated $1 trillion for investment in the insurance industry, according to Guy Carpenter and JPMorgan Chase Asset Management. And that capital is poised to make a major difference in how commercial insurance is sourced and provided.

Gone are the days when risk managers handled global insurance programs that largely didn’t change. The accelerated pace of technology in the past few years has fostered new ways of assessing and managing risk, in turn attracting non-traditional players to risk finance in the form of alternative capital.

A more recent accelerant to the trend this past year has been the increase in catastrophe losses. In 2016, more than 300 natural catastrophes and man-made disasters were recorded, generating $54 billion in insured losses, according to Swiss Re — the highest annual total since 2012. These losses have contributed to reduced profitability for insurers, which has made property insurance rate reductions more difficult to obtain

Forward-leaning risk executives are increasingly exploring new ways to back their property exposures via alternative capital. Many are beginning to view insurance as contingent capital and not just premium for paid losses. That can mean introducing capacity from the likes of pension funds and other sources into property insurance/reinsurance programs or looking to mitigate catastrophe and operational exposures through more than traditional catastrophe bonds.

A Better Fit for Risks

Traditionally, reinsurance companies have used several methods to develop their capital base, and alternative capital has provided a portion of that funding in recent years. Recently, investors are seeking new ways to apply their capital in the insurance sector, which often generates the type of non-correlated returns they seek.

The benefits for organizations of using alternative capital as a complementary form of risk transfer include:

  • Diversifying coverage.
  • Efficient and direct deployment of capital.
  • Competitive pricing.
  • Dedicated underwriting.

Advances in risk modeling technology allow insurance entities to match capital to specific risks with greater ease. Techniques once limited to the reinsurance industry are moving into the traditional insurance sector, leading to even greater choice for risk transfer.

The use of alternative capital needs to be part of a balanced insurance portfolio. Work with your insurance advisor to learn more about how alternative capital can work for you.  

For more information on how Marsh is #ReimaginingRisk at #RIMS2017, follow us on Twitter or visit www.MarshatRIMS.com.

Duncan Ellis

Duncan is a managing director resident in the New York office and is the leader of Marsh’s US Property Practice.