As cedants grapple with a shrinking pool of available (and affordable) property-catastrophe capacity from traditional reinsurers, the importance of finding innovative ways to transfer that risk in other ways, such as into the capital markets, has become crucial as buyers plan their renewal.

In what is increasingly becoming a perfect storm for insurers, working closely with a broker with strong links into this world has become invaluable. This requirement for innovative solutions is driving a strong uptick in enquiries and deals bring done by the capital markets and advisory unit at TigerRisk Partners, as Jarad Madea, chief executive officer of TigerRisk Capital Markets and Advisory, and Bill Cooper, partner in TigerRisk Capital Markets & Advisory, explained to Monte Carlo Today.

“A great many pressures have combined to mean that the risk appetite of reinsurers has changed. There is the challenging macroeconomic and political environment, the war in Ukraine, pressure on global supply chains, the cost of living crisis cause partly by energy supply problems, rising interest rates, inflation, and strong concerns over climate change,” Cooper said.

“All those things combined mean reinsurers want less volatility, but the investment community is also changing its risk appetite. As interest rates rise, for example, less money will be diverted into alternative assets from mainstream investment-grade assets because the yields on those will be better. Investment managers are allocating less funds to more volatile classes of business.

“But all of that is driving a reduction in risk appetite for more volatile asset classes. In the context of the reinsurance industry, that means property-cat business and that is why we’re seeing a severe squeeze on capacity. And, of course, this is happening at the exact time when demand for that coverage is increasing—partly because of inflation and increasing property values. It’s a challenging set of circumstances,” he said.

A perfect storm

All this explains why the expertise in TigerRisk’s team is more in demand than ever. This situation has also built strength just as the broker is in the middle of its integration into Howden, the result of the $1.6 billion deal between the two brokers announced in June.

This means, says Cooper, a bigger pool of expertise and resources in the unit to help cedants through this capacity crunch.

“In the context of the Howden deal, it means we have two very focused reinsurance businesses coming together at just the right time,” he explained. “Tiger’s Capital Markets And Advisory unit will become the investment banking part of the combined entity. This is happening at one of the most challenging times for the markets in recent years, but it will mean we can offer a much wider set of capabilities that are going to be very significant for clients.

“No one is pretending there are any easy solutions, but using the toolkit—including the ability to go to capital markets investors and tailor bespoke products and solutions—is going to be very important for clients. We think we can do that at least as well as, if not better than, anybody else.”

Cooper argues that attracting money from the capital markets is the best solution to the property-cat capacity squeeze. Although investors require education and the decision-making process around putting money to work in the space can be slow, the advantage is that capital markets investors are much better placed to handle the inherent volatility in the line of business.

“Because the wider capital markets are so huge, the slice they have in alternative investments, and within that, the slice within insurance-linked securities (ILS), is very small in the scheme of things. It is a small part of a much bigger pie. It takes time to educate investors, but this represents a very valid and sensible solution in the context of the market conditions we are seeing,” he said.

While a potential source of capital can be identified, creating the mechanisms to put it to work is another matter. Cooper says he is seeing a growing number of innovations emerging to enable this. Some are new, others have been used before but perhaps forgotten by the industry. Now, necessity is driving innovation and invention.

One exciting possibility he cites would see ILS investors able to put their money to work more easily through Lloyd’s. He notes that the market’s CEO John Neal has stated publicly an ambition for Lloyd’s to double its premiums to have 10 percent of the world’s premium pool for commercial corporate specialty insurance and reinsurance.

To achieve this, Cooper says, the market needs to widen its collective investor base and attract investors who have historically allocated funds to the ILS market—estimated to be worth $103 billion at present. Lloyd’s has set up vehicles to facilitate this, the most recent being the protected cell company London Bridge 2, designed to give Lloyd’s participants a more flexible way to access capital markets, and for investors to access risk from underwriters.

“This facility will allow the market and investors greater choice in the way they transact and connect re/insurance risk with third-party capital, and hopefully enable Lloyd’s to catch up with offshore ILS jurisdictions and attract billions in funds from capital market investors,” Cooper said. “There has been some ILS activity at Lloyd’s for many years, but it hasn’t grown as quickly as it might have.”

He attributes the stymied growth to poor results in the market, its complex nature, which can be hard for investors to grasp, and the fact that, since formed, until very recently, rates have been depressed, meaning ILS was less appealing as an investment option.

Much of this has been rectified, he believes. “Pricing across most of the specialty market is going up quickly, especially in the property-cat business, due to a lack of supply of capital coupled with increased demand. There has been a desire from the top management at Lloyd’s to make Lloyd’s more attractive as an ILS venue—hence London Bridge.

“I believe it is increasingly clear that the advantages of Lloyd’s as an ILS venue are considerable, including the credit rating, the franchise and spread of business, which is unique in the world. The diversity of the Lloyd’s market means your capital can work harder than in a standardised sidecar,” he said.

Jumping hurdles

Cooper says that TigerRisk is bullish about working with investors in this capacity. He admits the education can be lengthy and the hurdles to be jumped over high, but he believes investors will increasingly enter the market in this way.

“We started with a long list of investors: some are brand new, others are existing ILS investors looking to increase allocation. You have to remember they’re always evaluating these opportunities against other investments that have nothing to do with insurance. And often we’re trying to attract money that hasn’t invested in insurance before.

“But it is a huge market and it will happen. Lloyd’s needs to be better aligned with how long it takes to raise capital but it is very open to helping investors and having a more flexible approach.”

Attracting ILS investors through Lloyd’s is just one of a number of innovations Cooper is seeing in the market, as cedants grapple with capacity constraints and rising rates. The re/insurance industry is embracing different and revised structures of businesses and balance sheets, he notes, and he thinks this is just the beginning of a journey that will see significant restructuring to its business operations and capital frameworks.

One example of this was the recent corporate reorganisation by Fidelis in which its business separated into a managing general agent (MGA) and a balance sheet. “The boundaries between policyholders, agencies and carriers are shifting and new entity structures are emerging, offering greater value for stakeholders,” Cooper said.

“For advisers, this will require a wider suite of skills. The insurance value chain continues to evolve with companies becoming more specialised. New types of entities and new structures are flourishing, from MGAs to fronting operations and, in the US, the rise of Reciprocal Exchanges.”

Reciprocal models

TigerRisk Capital Markets and Advisory has played a significant role in the growth of Reciprocal Exchange (RE) formations and capital raises for US insurance businesses.

“We continue to be at the forefront of this new trend, which has become increasingly utilised by programme managers and insurtechs, helping to transform the MGA business model by allowing MGAs to take further control over their capacity while continuing to drive fee income,” said New York-based Madea.

In the reciprocal model there are two entities. First, the RE, which is a risk-bearing balance sheet entity owned by its policyholders. Members provide surplus contributions, which are tax-efficient as they amount in addition to premium payments. Policyholders are not seeking similar capital returns as typical shareholders; they are looking for adequate insurance coverage and the cost of capital is therefore much lower than in the traditional model.

The second entity is the Attorney-In-Fact (AIF). This is the management function, and the fee-earning business which is independent of the RE and typically a highly valued business. It may be owned by the RE, in older vintage models, or by separate third party investors in recent formations.

There are now approximately 70 such structures in the US. TigerRisk Capital Markets and Advisory has been the advisor in seven out of the last eight reciprocal formations or capital raises, including for leading programme managers K2, Orchid and Sagesure.

“The reciprocal structure allows MGAs to diversify their capacity while maintaining control over underwriting decisions in a lower cost of capital structure,” Madea explained. “Reciprocal formations provide innovative platforms for growth that otherwise would not be available. The reciprocal model has been widely welcomed by market participants and we expect this trend to continue in predominantly cat-exposed states, which allow MGAs to efficiently increase their underwriting capacity to the market.”

The reciprocal model depends on a US legal framework, but Madea stresses that he believes the principles are transferable to other geographies. His team has held discussions with insurance players in Europe and London about how a similar model could be developed in those markets.

Another easily overlooked tool he cited is the use of mergers and acquisitions (M&A), including segmenting off and selling, or placing into run-off, books of business. “One should not forget M&A as a tool,” he said. “Some insurers might reshuffle their portfolios or maybe close down a division or portfolio to allow them to optimise their capital position. All these things are being looked at.

“The good thing is that we’re in a good spot to help by bringing all of the power of the firm to our clients. Obviously, we’re a reinsurance intermediary with a capital markets business so we’re trying to provide a holistic advice to our clients. We look at the whole toolkit.”

The combined entities of TigerRisk and Howden will comprise some 30 bankers, around 80 percent of which will have come from the TigerRisk side where the capital markets unit was bigger and far more established. To offer context on the unit’s activity, Madea says that TigerRisk has done just over 100 transactions since its Capital Markets unit was formed six years ago, and 40+ in the past two years.

“It’s really accelerated,” he said. “We are excited about the partnership. It significantly enhances the scale and depth of TigerRisk and Howden’s reinsurance and capital markets offering and creates the much-needed fourth global player in the reinsurance market.

“Overall, it creates a standout reinsurance and advisory business, bringing full capability and scale to Howden’s diversified and differentiated brokerage, MGA, capital markets and data & analytics proposition.”

He emphasised the fact that TigerRisk operates as one team, driving one P&L, as opposed to operating in silos. “Our reinsurance broker will talk to his clients and we devise solutions as one team. We understand the market and what we’re seeing, and it’s very much a two-way conversation.

“It is important to understand that it is rarely the case of a client using just one solution. Different solutions might be used together—there might be a traditional reinsurance cover, a collateralised deal and also the involvement of ILS investors. I think we’ll see more of that—solutions being used in tandem or linked together.”