THE EVOLVING LANDSCAPE OF “RISK TRANSFER”

Risk Capital: A Reinsurance Perspective

November 4, 2015

Federal Advisory Committee on Insurance

Presented by Jake Clark of Guy Carpenter & Co., LLC
GUY CARPENTER

2001 2005 2013-

2015

The evolving capital markets and continual growth of alternative risk transfer markets has changed the 

competitive landscape

1992

Note: SNL Financial, Company filings and Insurance insider. Start-Ups

Evolving Reinsurance Industry Capital Model

Watford Re

Tohoku / Other

Int’l Events Andrew WTC KRW IKE / FinancialCrisis

$365 

$3,023 

$633 $846 

$1,620 

$1,489 

$7,667 

$2,585 $2,280 

$2,151 

$11,260 

$12,081 

$9,881 

$4,052 

$3,688 

$5,252 

$5,889 

$8,087 

$9,436 

$10,460 

$4,492 

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

0

50

100

150

200

250

300

350

400

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Capital Contribution by Class ($MM)

World ROL Index

Total Capital Sidecar Catastrophe Bonds Start-Ups ROL Index

1

Hamilton ABR Re
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The Changing Reinsurance Arena

Influx of Third Party Capital

Source: Guy Carpenter, Oliver Wyman analysis

Third party capital deployed

2005-2015 YTD, $BN

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

+22%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Collateralised 

Reinsurance

Collateralised 

ILW

Sidecar

Bonds

2015

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The suppliers of alternative capital to the re)insurance 

sector have evolved since 2005 as reinsurance 

returns have fallen

Hedge Funds & 

Private Equity

Pension Funds & 

other Institutional 

Investors

Retail Investors
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An Expanding Field – Blending of the two models

Reinsurance markets with Alternative Capacity

Reinsurance companies [$334bn dedicated capital] have active ventures and / or direct 

access to alternative capital representing over $[15] billion of capacity

Independent (re)insurance capital markets players manage approximately $66 billion of 

additional capacity

Independent capital market managers

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TransRe
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Traditional 

Reinsurance

$278bn

85%

Convergence 

$48bn

15%

Traditional 

Reinsurance

$288bn

81%

Convergence 

$66bn

19%

Capital Markets Participation In Reinsurance Year over Year

Increased Deployment of Convergence Cat Capacity

+8.0% YoY 

Deployed Catastrophe Limit Growth

Traditional: 

+$10bn (+3.5%)

Convergence:

+$18bn 

(+37.5%) 

To date convergence capacity deployment has been almost exclusively in catastrophe lines, 

however, these markets continue to express interest in diversifying to other segments

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$51.7B-Wind

$2.6B

Global Cat Market

Limit $354B

Premium $19.8B 

RoL 5.6%

$155.1B

$11.4B $48.9B

$1.8B

$32.7B-EQ

$0.9B

$21.5B

$0.8B

$14.8B

$0.6B

$29.3B

$1.8B

Worldwide Property Catastrophe Market

2015 Estimate @ July 1st

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5
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Reinsurance Market Dynamics and Future Outlook

• Rating agency / regulatory capital requiring “rated carriers” to hold 

more capital

• Insurers / Reinsurers seeking to use non equity capital to warehouse 

business in current competitive pricing environment

• Hedge Funds / Private Individual facilities using a capitalized 

reinsurance vehicle as a way to lock in assets and obtain tax deferred 

income. 

• New investors are seeking insurance risk, but the asset class may not 

be large enough to support investor demand (limited supply of 

reinsurance)

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Closing “The Gap”

Economic vs Insured Loss 

− 73% ($2.7T) of nat-cat losses globally between 

1970-2014 were uninsured

− Global economic loss outpacing the deployment 

and/or recovery of insurance products. 

− HU coverage is on the decline EQ’s are almost 

entirely uninsured. 

7

41

14

7

1

18

8

13

19

38

 44

4

5

36

24

 37

21

 46

6

15

22

16

45

3

5

20

31 10

9

29

22

23

34

49 3

2

5

30

 28

17

32

 

39

4

3

5

0

4

2

4

7

3

3

1

2

Ranking of States by Long-Run Solvency (2012)

− Some of the nation’s most catastrophically 

exposed states have long-term financial 

challenges.

− Northeast: Wind / Flood 

− CA & IL: EQ / Flood 

− Gulf / South: Wind / Flood

− Federal government has accrued $10.9 trn

in debt since 1980 alone

− Exposure to natural catastrophe risk is 

unsustainable

Source: Munich Re NatCAT Service; George Mason University Mercatus Center, 2012 data;
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Top limit = 

Flood Re’s limit of liability

QS aggregate limit = 

Flood Re’s limit of liability

50% placed 50% placed

Challenge #1: Flood Risk Management

The UK’s Flood Re – Potential Outwards Reinsurance 

03 November 2015 8

Risk XL Quota 

Share

Aggregate

XL

Financial

Stop Loss

Manage “Band H” volatility

100% Placed

Protect Defra requirement 

to limit impact on public

sector net borrowing to

£100m any one accounting

year

Reinsurers share pool performance

Flood Re protects result volatility

Reinsurers take pure catastrophic exposures 

Flood Re protects extreme volatility

Deductible increases over three years

“In the face of the rising flood risk, we have estimated that 350,000 flood risk UK households 

would struggle to obtain affordably priced flood insurance without a scheme like Flood Re.”
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Challenge #1: Flood Risk Management

The NFIP & The Flood Insurance Risk Study 

• Flood Insurance Risk Study

– Required under BW’12:

- How to privatize

- How to utilize reinsurance 

– Dynamic risk analysis

• Peer analysis 

– Compare risk financing 

employed by the NFIP & other 

large buyers of reinsurance

– NFIP vs. FLA Citizens (2013)

9

40 ~yr PML

 Coastal Accounts PLA & CLA Accounts

2013 Florida Citizens

NFIP as of Sept. 2014
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Challenge #2: EQ Underinsurance 

Significant and Systemic Economic Risk to Governments

• Missouri State Insurance Director, John Huff: “We have reached a critical 

juncture...the amount of uninsured property in MO will soon eclipse the amount of 

insured residential property ($100B), this could jeopardize our ability to fully recover 

from a major earthquake."

Source: 2015 Missouri Insurance Report & AIR Worldwide 10
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Challenge #2: EQ Underinsurance 

Significant and Systemic Economic Risk to Governments

November 3, 2015 11

> $354 billion

Global Property Cat Limit Issued

While GSE’s are expanding use of 

mortgage reinsurance to expand risk 

sharing around credit default exposure, 

these approaches offer limited protection 

against losses arising from EQ 

− 1:100 California EQ event suggests 

residential insured losses of $10bn vs. 

$60bn assuming 100% take-up 

− Earthquake take-up low b/c market is 

inefficient: expensive and limited 

coverage

Source: AIR WORLDWIDE

Comparison of modeled total damage, insurable loss (total damage minus deductibles and limits, assuming a 100% take-up rate), and insured loss for the residential line of 

business on an annual aggregate basis (Source: AIR Worldwide)
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Creating A New Paradigm to Address Catastrophic Risk 

Supporting the Creation of Public Private Partnerships

• Public-Private-Partnerships (PPPs) can open new opportunities to unlock risk capital and 

expand risk transfer solutions. Partnering is key to tackle the most pressing challenges of 

the day.

– New thinking by insurance professionals, capital providers, policymakers, and 

regulators is required to create win-win arrangements

• A variety of risk-capital and related risk management services are required to address the 

growing level of risk faces by society in today’s world so that more resilient risk transfer 

solutions can evolve. 

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• Innovative risk transfer approaches 

through PPP’s have evolved to tackle 

pressing nat-cat related risks and 

terrorism risk.

• Unique attributes from a variety of 

stakeholders (the public, private sector 

(re)insurance, ILS capital, and 

governmental entities) can be harnessed 

to bring innovative risk financing solutions 

to bear across a variety of other pressing 

risks as well. 

Source: Swiss Re
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 Guy Carpenter & Company, LLC provides this report for general information only. The information and data contained herein is based on sources we 

believe reliable, but we do not guarantee its accuracy, and it should be understood to be general insurance/reinsurance information only. Guy Carpenter & 

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