Tag Archives: Insurance Linked Securities

The ‘New Normal’ for Reinsurers

Third-party reinsurance, or alternative capital, has become a “new normal” for reinsurers as they seek to remain competitive, meaning that so-called convergence capital from the insurance-linked securities (ILS) market will remain key.

Despite falling for the first time in 10 years, the use of ILS or convergence capital by insurance and reinsurance firms has become increasingly strategic and embedded within their business models.

This has led rating agency S&P Global Ratings to call ILS capital “key,” explaining that the use of third-party capital, particularly by reinsurance firms, should be considered a “new norm” as it is incorporated into their operations to help them remain competitive.

In a new report, S&P explains that after the dip seen in ILS capital following the losses of recent years, the inflows to ILS funds and other collateralized reinsurance vehicles have continued, although at a slower rate.

S&P notes the flight to quality, the well-documented ability of the more established, largest and best-performing ILS fund managers to continue attracting capital, explaining that, “we believe capital will continue to flow into the market, particularly to insurance-linked security (ILS) funds with strong underwriting, established track records of successful capital deployment and transparent reporting.”

Overall, the rating agency says that it expects that “convergence capital will continue to play an important role in the competitive dynamics of the global reinsurance market and bolster capacity.”

While traditional reinsurance firms will increasingly “factor third-party capital into their strategies to help them respond to the ongoing challenging competitive environment.”

See also: Model for Collaboration and Convergence  

S&P highlights that investors have shown some reluctance to enter the ILS market, or to reload their allocations to reinsurance linked investments following the major catastrophe loss years.

This is “not surprising,” S&P says, following the two worst performance years for ILS and catastrophe bond investments since the market’s inception.

In addition, 2019 returns have been depressed by the continued impact of prior year losses and loss creep, as catastrophe loss events such as typhoon Jebi and hurricanes Irma/Michael continue to develop.

But even taking into account the catastrophe losses and loss creep suffered by ILS investors, “new capital has entered the market–albeit at a slower rate,” S&P explains.

But the focus of investors has sharpened, S&P continues, saying that “the recent losses have put investors’ focus on seeking out the best available returns.”

S&P believes that enhancements to models and adjustments to contract language, such as peril exclusions, will encourage further growth of the ILS market, once the recent losses are settled.

“Many third-party capital investors have made good returns over the long term, and the argument for investing in insurance risk to achieve portfolio diversification remains valid,” the rating agency explains.

It added, “For cedants, this means that there is capacity for the right risks at the right price.”

The collateralized reinsurance segment of the market has demonstrated that “convergence is truly underway,” S&P notes.

“All players continue to innovate and explore different routes and solutions to gain access to capital or insurance risk in the most cost-effective manner,” S&P continues, trends that are developing very quickly as new startups are set to demonstrate in months to come we would add.

Rated reinsurance vehicles is one route to market that is more direct and efficient, as are initiatives that seek to bring ILS capital closer to pools of directly originated risk.

Insurer- and reinsurer-owned third-party capital vehicles are perhaps where the greatest convergence is seen, as here the capital markets are directly integrated into the traditional business model as augmentation to the re/insurers own balance-sheet capacity.

“These platforms help insurance and reinsurance companies attain greater scale and relevance as well as target lines of business where the returns might not support their own cost-of-capital adequately, which would allow them to provide more complete solutions to their clients,” S&P explained.

In the past, traditional reinsurers viewed third-party capital as a “nice to have,” S&P says.

But now, “It has become the new norm, with established players incorporating third-party capital into their operations to stay competitive.”

S&P further explains that in analyzing reinsurers for rating purposes it looks closely at the businesses risk profile, with its competitive position compared with peers a key factor in this.

Typically, a company with a stronger competitive position is expected to exhibit consistently higher and more stable profitability metrics than peers, S&P explains, leading it to say, “Using third-party capital to profitably grow the top and bottom line should, in general, reflect positively on this assessment.”

That reflects the rising importance of having access to third-party capital and owning the deployment of it for reinsurers.

But, we would again note that it has yet to be proven out how this strategy will play out for all reinsurers, as they look to juggle own balance-sheet shareholder capital with that raised into reinsurance vehicles and ILS funds they own.

Is the fee income and profit share that can be earned by underwriting using third-party capital really a sufficient replacement for the profit earned by underwriting using a reinsurers’ own balance-sheet?

Or will the use of increasing amounts of third-party capital force the need for increasing efficiency and lower expenses on reinsurers?

In addition, the questions of conflicts of interest remain and have not been answered to the satisfaction of many investors, who find allocation decisions by reinsurer-owned ILS vehicles and funds often difficult to understand, largely because the explanations for decisions are often not particularly well-articulated.

While some players seem to be managing this juggling act adequately for now, it is going to take time for the industry as a whole to establish just how successful this will be across the sector.

Questions also still exist about what will happen if rates continue to rise, so reinsurers decide their appetite for catastrophe risk on their own balance-sheet has increased?

See also: Shift in Capital for Reinsurers?  

Will they continue to feed their third-party investors at that point in the cycle, and how will allocation decisions (to the different forms of capital) change at the same time?

The crux of this is that reinsurance is still evolving and the market adapting to the availability of capital market financing, the use of financial market technologies such as securitization, and the emergence of the ILS investment market.

In addition, the use of data and technology is going to change the playbook again for re/insurers and ILS fund managers alike in years to come, with the evolution and disruption we’ve seen so far likely to be eclipsed by what comes next.

Yes, convergence continues, looks set to be sustained, will likely accelerate and has certainly become a “new normal.”

At the same time, it remains early days in this evolving world of reinsurance and risk transfer, with the winners and losers yet to be fully identified.

Which all means there is plenty of room for change and for new strategies to emerge, as the traditional insurance and reinsurance market continues to converge with the growing sources of third-party capital.

You can find the article originally published here

Headwinds Facing the ILS Market

Hurricane Andrew’s devastation and lasting financial impact created a need for an alternate means to access capital and transfer risk. Enter the Bermuda market, and, on its heels, the insurance-linked securities (ILS) market.

The latter has been growing steadily ever since the mid-1990s. Fast forward. and some traditional reinsurers now offer ILS fund management. Other reinsurers have purchased prominent ILS fund managers, as was most evident with the well-publicized Nephila acquisition by global re/insurance giant Markel. This recent mainstreaming had brought about all sorts of acknowledgment.

However, while everyone was patting each other on the back, various catastrophes were occurring on a global scale. From earthquakes, floods and typhoons in Asia to hurricanes and fires in North America, the industry incurred increasing losses in 2018. Coupled with the 2017 loss creep, these losses have affected several ILS vehicles, and investors/fund managers are rethinking their respective capital allocation strategies in the coming renewal season.

ILS plays an important role in providing efficient capital to insurers and reinsurers (through retrocession) that sponsor the deals, but it is not without risk. Recent developments in the marketplace have the collateralized funds space facing headwinds. For these important investment vehicles to continue as beneficial components of ceded reinsurance programs or investor portfolios, some things need to change.

Perhaps the greatest contribution from ILS has been its ability to smooth pricing volatility in the regular reinsurance underwriting cycle. Every time there has been a large storm, or series of storms, reinsurers respond by raising prices in a phenomenon known as “payback.” This cycle went on for many years until the recent ILS “coming of age.” With an abundance of capital, reinsurers are pressured to keep their rates down to compete for shares of a given deal. Reinsurers are also able to take advantage of this downward pressure in pricing with their own reinsurance known as retrocession.

Along with helping insurers/reinsurers access capital for additional capacity, ILS are a means for institutional investors to diversify their portfolios to non-correlated risk. What this means is that rather than their funds being tied to financial markets, where they’re subject to things like credit risk, the funds are tied to triggers from catastrophic natural disaster events. In addition to this diversification, the returns also make ILS an attractive investment to the sophisticated institutional investor. In the absence of considerable aggregate loss totals, these transactions are a “win win” for all parties involved.

Followers of reinsurance industry news in 2018 know there’s no shortage of praise directed toward the ILS space. But a shift in attitudes occurred very recently, months or even weeks ago.

The industry was so impressed with the resilience of the ILS market following the 2017 HIM losses (Harvey, Irma and Maria) and the “reload” of capital that followed. However, this “reload” of capital occurred prior to realizing the additional effects of the 2017 loss creep from the HIM storms. Loss creep occurs when the final loss amounts from an event aren’t known and the reserves must be increased due to changes in projections.

Along with the 2017 loss creep, 2018 shaped up to be another year of catastrophic losses. The California wildfires, Typhoons Jebi and Trami in Japan and Hurricanes Florence and Michael in the southeastern U.S. all added to the problem seen in collateralized reinsurance deals.

In a collateralized reinsurance transaction, collateral is put up by investors to cover the full limit of the reinsurance contract. As a result of the catastrophes piling up, much of the collateral on the deals has become “trapped.” While the final loss number is being determined, the trapped funds cannot be moved or re-allocated into new deals. We’re seeing that this has led to some fund managers having difficulty renewing core components of their portfolios. This could lead to reinsurers being more aggressive to take back their market share with traditional capital. Perhaps this is just a short-term correction, but one thing is for sure: The trapped collateral issue needs to be solved sooner rather than later.

See also: Fixing the Economics of Securities Defense

These recent changes in the ILS marketplace have only affected a few funds and strategies. According to market intelligence sources, most are renewing as planned. However, the changes highlight the potential for disaster down the road if nothing is done to correct these issues.

In my mind, there is an excellent opportunity for sponsoring insurers and reinsurers to collaborate with the investor base and fund managers. Collaboration could lead to outcomes that better provide sponsoring organizations with the efficient capital/collateral that they’ve come to rely on while simultaneously providing investors with greater flexibility in the deployment of their capital. Insurers, reinsurers and institutional investors have demonstrated their needs for ILS, and it’s up to all parties involved to continually improve the space.

Insurance-linked securities are the present and future of risk transfer, but recently their vulnerabilities are being exposed. The negative effects of trapped collateral threaten to disrupt more funds if enough capital is tied up.

Thankfully, ILS experts are reportedly working diligently to solve this problem. ILS provides sponsoring insurers and reinsurers an efficient source of capital while providing diversification for institutional investors. I’m inclined to believe that, for these reasons, ILS arrangements are here to stay in some way, shape or form.

Throughout this piece, I’ve put myself at the risk of oversimplifying a very complex subject. There are different types of ILS vehicles, fund strategies and investor types currently in existence. In fact, you’ll notice that I didn’t even touch on the potential impact of rising interest rates; that’s a discussion for another time. My hope is that these thoughts will provide additional dialogue on the headwinds facing the ILS space. These difficult times are a test and an opportunity for improvement that could lead to a more efficient, capital-rich market.

Top Emerging Risks for Insurers

Over the past two decades, enterprise risk management (ERM) has evolved from a novel concept to an accepted and mature business practice. As such, insurers have significantly improved their identification and mitigation of risks, especially in the areas of underwriting aggregation, capital inefficiencies, dominance of legacy systems and others. Certain emerging risk areas are definitely on insurers’ radar screens, such as: the Internet of Things (IOT), autonomous cars and climate change. Yet, there are other emerging risks that are not fully recognized or understood. These require a robust application of enterprise risk management techniques.

Alternative Capital at the Primary Level

So far, alternative capital providers, in the form of insurance-linked securities. collateralized reinsurance, etc., have made their impact felt among reinsurers. Primary insurers, of course, have used alternative capital in place of traditional reinsurance, usually CAT bonds. However, primary insurers have not felt the threat of being replaced by alternative capital.

The risk is real that large books of low-volatility policies, which would normally be covered by primary insurers, could be packaged by banks, reinsurers or other parties into securitized risk pools. Such packages would be attractive to investors, who want to participate in a different tranche of risk than currently offered at reinsurance levels. Thus, primary insurers could be bypassed altogether, at least, in terms of bearing risk and being paid for risking their own capital for doing so. Primary insurers would likely be needed to supply some services, such as actuarial and claims, by the party packaging the pool. But insurers could be replaced over time by other entities, given advancements in automation, coupled with artificial intelligence.

See also: Insurers Grappling With New Risks  

Before a wholesale movement of business occurs, primary insurers themselves could package large books of their less volatile business and offer them as alternative capital investments. However, in doing that, they may hasten the scenario where other parties become the packagers, simply by virtue of providing the example.

Market Fragmentation

It is clear now that internet players, which are expert at digitization as well as a variety of other forms of innovation, will be insurers as well as distributors of insurance. What is less clear, but is nevertheless an emerging risk area, is how well they will perform at profitability and how much market share they will absorb. Despite the lack of clarity at this point, the risk boils down to increased fragmentation in the marketplace wherein large and small insurers, alike, will have to deal with more competition and a greater division of business among all players.

It is not uncommon for personal insurance buyers to bundle their home, auto and either small business or life insurance with one or two carriers. But with more choices in an already crowded arena and heightened ease of doing business, it is easy to picture the same individual buying his or her 1) auto coverage from a per-mile internet provider because of best rates, 2) homeowners coverage from another internet provider because of its social responsibility stance, 3) small business coverage from a traditional insurer because of its customer service and 4) life insurance from yet another internet provider because it requires less information and hassle.

It is also easy to see that more provider choices for customers will likely lead to less volume for any one insurer. Already there over 5,000 insurers domiciled in the U.S. Although the larger insurers control a disproportionate share, more active insurers may play havoc with that situation while knocking out some smaller insurers altogether.

Bottom-line, fragmentation risk carries burdens for insurers in terms of: 1) how  to vary expense with volume, 2) how to keep their brand awareness and image vibrant and 3) how to encourage and manage continuous innovation.

Cyber Aggregation

Cyber has become a growing line of business among many, mainly larger insurers’ portfolios. When insurance pundits are questioned about where growth will come from, cyber is the answer cited most often, usually followed by privatized flood insurance.

See also: How the Nature of Risk Is Changing  

Although loss modeling has come a long way for natural catastrophe events, it is still in its infancy when it comes to cyber events. Thus, the progress that insurers have made in managing how much aggregate business they write subject to hurricane or earthquake prone losses is far superior to their ability to manage cyber aggregations.

This risk area is incredibly significant because of factors that this author has written about previously. Cyber events can potentially be either or both simultaneous and ubiquitous, unlike natural catastrophes, which tend not to happen at the same time or simultaneously around the whole world. Consider the magnitude of the losses if the “Not Petya” cyberattack that happened to Merck were to have happened to the entire Fortune 500 or to half of the Fortune 1000 during the same week. The insured loss alone for the Merck attack was estimated by Verisk-PCS as $275 million. Alternatively, consider the losses if hackers were to strike the electric grid in five major cities at the same time.

Insurers face the risk that they are assuming more risk than they realize or are capable of handling should a massive, coordinated attack occur. Until models are more perfect, insurers should proceed with an abundance of caution.

3 Big Trends for Reinsurance in 2018

As 2018 begins, what key trends will shape the coming year, and how can you position yourself to capitalize on them? 2017 was a tumultuous year for the reinsurance industry, so, which reinsurance themes will carry over into 2018, and how is the industry positioning itself?

1.  Cyber: software is eating the world

With the relentless invasion of software into every aspect of our lives, you see businesses, governments and consumers all wanting to cover their cyber risks through comprehensive reinsurance policies. The issue is that the pervasiveness of software exposes many more lines of reinsurance to cyber risk than is first apparent. How then can the reinsurance industry be more dynamic in understanding and pricing these aggressive and fast-evolving risks in a timely and efficient manner?

See also: The Dawn of Digital Reinsurance  

PCS made an important step in September by launching a Global Cyber Index to provide industry loss estimates for international cyber events. The creation of the index is the first step to developing cyber-focused insurance-linked securities (ILS) products.

2. Alternative capital will continue to be important to the reinsurance market

Although the 2017 hurricane season is projected to be the costliest in U.S. history, the demand from capital markets for reinsurance risks is unlikely to diminish. Trapped collateral and ILS losses may put off some existing investors, but new investors looking for uncorrelated returns will continue to enter the marketplace.

With around $30 billion of outstanding catastrophe bonds and ILS, 2017 saw historic levels of catastrophe bond issuance. This has encouraged the U.K. government to support the growing market by approving new Risk Transformation and Tax Regulations last week. The impact of these regulations will be fully tested in 2018, but, as the market grows, increased transparency and the ability to trade ILS products on a secondary market will be aided by the appearance of electronic marketplaces.

3. Technology developments will continue to improve the reinsurance industry 

The pace of innovation and change, driven by technology, across the reinsurance industry gathered momentum in 2017. At AkinovA, we continue to work with a number of the leading re/insurance market participants to build an independent third-party marketplace for the transfer and trading of risk.

The Unicorn Hiding in Plain Sight

Attend any insurance-focused conference, and you will undoubtedly hear about the high volume of angel and venture capital currently chasing the next unicorn in insurance – the industry equivalent of Facebook or Amazon. In the search for value, investors are first asking questions about how long it will take for innovation to transform the industry’s business model or who will be the major disrupters. Is it the new approach to distribution that will render the current ecosystem extinct? Is it a different approach to underwriting courtesy of new advancements in data and analytics? These are legitimate questions – but what if we are looking in all the wrong places? What if the next Uber of insurance has already arrived?

An important component of the value chain in consumer-facing markets is access to the customer. Creating a user-friendly application drives user engagement, and therefore retention. The critical difference in the insurance industry, however, is the lack of engagement. Insurers are challenged with a product that does not lend itself to a frequent interaction with clients. There are typically only two points of contact: sale and claim payment. Though both present opportunities to build customer relationships, this number is orders of magnitude lower than for consumer technology applications. This means insurers need a better solution to work around the value chain to gain control of the customer, one that involves driving down costs. Herein lies an unexpected solution – alternative capital.

Alternative capital refers to pools of capital available for the transfer of risk from an insurer to the capital markets, typically in the form of insurance-linked securities (ILS) or special purpose vehicles (SPVs). The impact of alternative (or third party) capital is well understood in the reinsurance world today as global risks have been packaged, turned into portfolios and offered to the very largest providers of capital in the world as an alternative, risk-bearing asset class. The size of the market has grown considerably in recent years, with alternative capacity reaching $86 billion, or 14% of global reinsurance capital, as of the first quarter end of 2017, according to Aon.

Alternative capital represents 14% of global reinsurance capital

The question, though, that investors should be asking is: Who has access to the cheapest capital? The answer to this question, the authors believe, will yield important insights as capital efficiency enables players in this space to get closer to the clients and, more specifically, the source of risk. After providing appropriate scale for disruption in the industry, along with an important framework to understand industry cost of capital, we consider evidence from the banking sector and anecdotal data from current trends in the market to argue that the Uber of insurance is already here.

See also: Preparing for Future Disruption…  

Disruption at Scale

In an era of rampant overcapacity, it is sometimes easy to forget the historical significance of access to risk-based capital. The explosion of new technology applications to challenge the gatekeepers in the industry, funded by a dramatic rise in venture capital for Insurtech startups, has taken a lot of interest among industry participants. Insurance and reinsurance applicants are still, though, fundamentally sending submissions and applications to be accepted as insureds and cedants. There is an offer of risk transfer for premium. Unless platforms that control the customer also start retaining the risk with an equal to or lower cost of capital, the incumbents are still likely to control the system. Until this happens, those who build the best capital platform can offer the best products to attract customers, with the lowest-cost capital translating to lower prices for consumers – a reality supported by the scale of alternative capital disruption.

Alternative capital currently on risk in 2016 dwarfs VC funding in Insurtech

While the scale of insurtech investment itself is enough to make serious people sit up and take notice, it is the speed, velocity, sources and efficiency of capital that will drive the future direction of the industry. To assess the long-term impact to the industry of these dueling solutions to disruption, an understanding of the drivers of industry cost of capital is required.

Insurance Company Cost of Capital

While ILS as a practice is nearly 20 years old, we are still in the first inning of how this once-niche part of the global reinsurance and risk transfer market will expand its influence. The current problem the industry is facing is that it does not do a good job of differentiating capital sources with specific levels of risk. Investors looking for a 5% or 7% or 11% return all fund risk whether at the 1-in-50 return period or 1-in-250 return period. This capital inefficiency not only lowers margins but also increases the cost of capital and perpetuates a system that hinders new product development at the expense of the end consumer. The use of third party capital gives underwriters the ability to cede remote, capital-intensive risk off their books and onto a lower-cost balance sheet. This matching of different types of risk with different pools of capital produces a leaner, more customer-focused, lower-priced risk transfer market, ultimately benefitting the end consumer from cheaper reinsurance products.

The industry also cares about returns. Meeting analyst expectations has become increasingly difficult as pricing and investment yields have declined. Because insurance companies operate in a market that is becoming more commoditized, insurers and reinsurers need to either find another way to increase returns or figure out a way to lower their cost of capital. Alternative capital providers have a fundamental advantage in this respect, as “…pension fund investors are able to accept lower returns for taking Florida hurricane risk than rated reinsurers, for whom the business has a high cost of capital.” Similarly, the opportunity cost of capital for a typical venture capital fund (17% before management fees and carried interest) outstrips the hurdle rate for pension fund investors who turn to catastrophe risk as a diversifying source of return.

Similarities to the Banking Sector

The importance of cost of capital in determining winners and losers in capital-intensive industries can be clearly seen in the banking sector. When banks accessed lower-cost capital through capital market participants, their balance sheets were essentially disintermediated as they no longer had to finance the bank’s capital charges. By going straight from the issuer to capital and removing the need to finance these expensive capital costs, the aggregate cost of the system (value chain) was reduced. This benefitted consumers and drove retention in the same way we normally associate technology disintermediating distribution in other industries to drive down costs.

Just as loan securitization transformed the banking industry, so, too, can risk securitization change the economics and value proposition of insurance for the end consumer. Capital disintermediation offers new operating models that connect the structurers of risk with the pricers of risk, until disrupters prove they can do this better. Because insurance underwriters and mortgage loan originators retain differing levels of risk ceded to the capital markets, gaining access to the most efficient forms of financing is an increasingly important battleground for players in the insurance space. When investors no longer tolerate capital inefficiency and increasing returns proves challenging, value chain disruption is a real threat because the lack of client proximity and customer engagement provides no competitive moat. A comparison between the recent growth in U.S. P&C industry direct written premiums and growth in U.S. P&C industry surpluses shows just why capital efficiency is so important.

Renewed focus on capital efficiency as industry surpluses overtake industry premiums

Industry surpluses have increased at a rate more than double that of industry premiums ($418 billion increase vs. $200 billion increase) since 2002. The surplus growth relative to premiums highlights the steep drop in capital leverage from 1.4 in 2002 to 0.8 in 2016. As insurers sit on larger stockpiles of capital, they are relying less on underwriting leverage to juice up returns to meet their cost of capital. Hence, pricing power and cost controls have taken on increased importance.

The Current Fall-out

The growth of alternative capital has fostered innovation, both directly and indirectly, among industry participants across the value chain. Under the weight of efficient capital, industry players can take a step beyond leveraging insurtech to create value within the system – they can collapse it. In fact, we are seeing this happen right now. ILS funds such as Nephila are bypassing the entire value chain by targeting primary risk directly. Nephila’s Velocity Risk Underwriters insurance platform enables the ILS manager to source risk directly from the ultimate buyer of insurance. From consumer to agent to the Nephila plumbing system, homeowners’ risk in Florida can be funded directly by a pension fund in another part of the world.

See also: Innovation: ‘Where Do We Start?’  

Innovation is a healthy response, and this evolution of the reinsurance business model, while producing losers, will produce a leaner, more customer-focused, lower-priced risk transfer market in the end, ultimately benefitting everyone. The opportunity set for alternative capital to benefit the industry is not just limited to retrocession and access to efficient capital. Leveraging third party capital to provide better products and services to clients allows insurance companies to not only expand their current product offerings but also extend the value proposition beyond price alone, with different capital sources offering different structural product designs, terms, durations and levels of collaterization.

Consider solar. The insurtech solution to creating a product that will provide protection for this emerging risk might include distribution and analytics. In contrast, partnering with third party capital providers can allow an insurance company to create a product with unique features such as parametric triggers that could solve a problem the traditional reinsurance industry, with its complicated and long casualty forms, has long struggled with. In doing so, third party capital can help grow the market for insurance in a way that insurtech has not yet achieved.

Conclusion

Two of the most common counterarguments for alternative capital’s Uber-like impact on the industry are that it remains largely untested capital in the face of a significant event and that we’ve hit a ceiling on the limit of third party capital in the traditional reinsurance market.

On the first point, as of this writing, it is still too early to assess how existing and new potential third party capital investors will respond to hurricanes Harvey and Irma in coming renewals. However, the combination of the ILS market’s established track record, experience paying claims and fund managers staffed by people who have long experience as reinsurers provides support that investor interest post-event will remain strong.

As for the second, in a static world, that claim may be true. But we believe there is plenty of room to grow in this market from both a supply and demand perspective. On the supply side, ILS accounts for only 0.6% of the global alternative investments market, with ample room to increase assets under management, according to the latest survey on alternative assets from Willis Towers Watson. On the demand side, around 70% of global natural catastrophe losses remain uninsured, and these risks are only growing. Insurers will require protection against aggregation and accumulation risk, and increasingly see the natural home for the tail risk in the capital markets and ILS.

We have witnessed alternative capital’s ability to attract risk to capital and lower aggregate cost of the entire value chain. Many in the industry are monitoring how insurtech will sustainably attract risk and attract customers over the long term. In the meantime, the companies that have used their time wisely in the soft market by increasing capital efficiency to source, return and attract new forms of capital the quickest will be well-positioned in the space and can happily partner with great distribution partners of their choice. Even so, the players with the lowest cost of capital can accept risk more quickly and easily and can develop products more cheaply and with unique technological features for consumers.

Insurtech will still play a pivotal role in shaping the future of the industry. Most of the participants in the insurtech space are in the early stages of capital formation. As investment scales and business models mature, insurtech should help leverage the proliferation of new sources of information and data pools to advance the securitization of different types of risk. Access to enhanced analytics helps make the underwriting and funding of more intangible risks, such as reputation and contingent business interruption, more sustainable, thereby increasing the participation of third party capital in lines of business outside property catastrophe.

In the mid-1990s, far less than 1% of global reinsurance capacity was alternative capital; by 2016, its influence had grown to nearly 15%. Here is our question for the next industry conference: What will alternative capital look like in 2030?