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Willis Re: The hybrid future

Source: Asia Insurance Review | Nov 2016

We catch up with Mr James Vickers, Chairman, Willis Re International, in Monte Carlo, where he tells us that alternative capital is here to stay and the reinsurance industry will move towards a hybrid model.
By Benjamin Ang
 
 
“Wishful thinking,” said Mr James Vickers on alternative sources leaving the market should a big event strike. 
 
   Clearly, if there is a big event, some of the funds are going to have trouble but the majority will not. “Alternative sources of capital have matured. A lot of the capital is now coming from investors with a much longer timescale. It is a permanent part of the market now and we are likely to see more capital coming in,” he said. 
 
   In fact, in some areas of the market, ILS funds are even more mature and disciplined in their approach than traditional reinsurers. For example, the Florida CAT rates. He said: “As rates come down to a point where they cannot hit the returns promised to investors, ILS Funds are withdrawing their capacity. Whereas traditional reinsurers may adjust their portfolio in a bid to keep writing.” 
 
The hybrid way
With alternative sources of capital a permanent feature, the market is coming together in a hybrid way. Some traditional reinsurers are also performing the role of fund managers by managing pools of capital and using their skills to source business. Likewise, some ILS funds are also setting up their own reinsurance Companies. 
 
   “That is the trend to come. Some form of hybrid model where mangers manage different pools of capital,” he said. 
 
   This makes the role of a reinsurance broker even more important as strategic buying of reinsurance becomes more complicated. The analytics around assessing risks and structuring has become more sophisticated. “As regards the transferring of risk, the advice and knowledge around who to place it with and which markets might be best will be more complex and buyers will need to rely more on the advice of brokers,” he said 
 
   And Willis Towers Watson is well-positioned to succeed. Mr Vickers said: “We have had a turbo-charged boost following our merger with Towers Watson. We’ve always had a significant capability, and now we have a massively bigger capability. We have a whole suite of service offerings so there’s really virtually no type of service that a primary company or reinsurer might want that we can’t provide.” 
 
The current market
On the state of the current market, he expects that reinsurers are not going to push substantially for rate increases. “There will be some continued gradual softening of the market. Probably less than we’ve seen in the previous years but it is still not going to completely stabilise and certainly not reverse.” 
 
   There are some encouraging signs. “The big buyers that were retaining more risks, now seem to be recognising the capital efficiency and earning stability that they can gain so we are seeing more reinsurance premium flowing back into the market,” he said. 
 
   “In Asia, it is largely the same. Sure, there is underlying growth in premium in most markets in the region and it makes people hungrier as everyone is looking for growth. But the same macro trends occurring around the world apply exactly to Asia,” he added. 
 
Increasing localisation
On concerns, he cited the increasing localisation of regulations. “My working career has always been about globalisation. In the last few years, it seems to be going in reverse. More countries are getting tougher and are seeking to restrict the flows of reinsurance premiums. It runs counter to the whole concept of reinsurance with free flow of capital and risk diversification around the world,” he said. 
 
   The global reinsurance industry has to do a better job at explaining the value it brings and the constructive role that it plays in supporting resilience in the wider society. 
 
   “Hence developments such as the Insurance Development Forum, are very important platforms to help us achieve this goal. Willis Towers Watson is very heavily involved as a key driver of the initiative. If we, as an industry, can demonstrate our value to society, it will help us to explain why some of these de-globalisation trends are not helpful to society as a whole,” he concluded.
 
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