The lines between third-party capital, which is provided by investors and often structured as insurance-linked securities (ILS), and traditional insurance and capital insurance capital, continue to blur.
AM Best says this in a recent report, in which it explains that traditional funds will shrink this year, while other investment funds will grow.
In fact, the latest estimates from AM Best and broker Guy Carpenter show that traditional insurance premiums will fall by 8.5% this year, while alternative premiums will grow by 1%, indicating closer to 10%.
It is the first year in a long time that we see this happening, as both types of funds grow every year, until 2018 when some of the funds from the ILS fund source started to decrease a little behind economic losses and catastrophic losses.
Although third-party capital and investors have been fighting fatigue, despite new opportunities opening up in the ILS market, AM Best says that the use of third-party funds is being integrated into traditional business practices.
The lines continue to be blue and whether you call this continuous evolution, or not (some said we saw capital sources and use a few years ago), it is impossible to deny this to many people who have insurance, some people. Capital and ILS strategies are becoming more important to their business, whether it’s security, growth, or communication strategy.
AM Best explains, “The global insurance market has changed over the past decade, as has the capital base.
“Third-party payments and the number of large businesses are closely related to the insurance business, which has affected not only the amount of money, but also their use.
“Many of the participants in the insurance market now have large insurance and third-party expertise, which creates a gap between the insurance capital and other activities and businesses in the organizations.”
Are reinsurance businesses more closely aligned with third-party capital and issuers?
Or will traditional recycling businesses become more reliant on access to good financing, including ILS and venture capital, and better understanding of the benefits they can bring to their businesses?
AM Best says that the fact that many recovery companies are scaling back or reducing their exposure to disaster presents an opportunity for ILS markets and ILS investors.
That’s the way it is, but we’re already hearing from sources that some of the backers are also looking for ways to build relationships with investors who have an appetite for more risk.
Even those who have existing relationships, have begun to see that it is better to continue the risk of property damage through their third-party vehicles, than to give up their position in the market.
This, for re/insurers to fear frequency, volatility and uncertainty of weather and catastrophic damage, can lead to new efforts to bring third-party funds into regular insurance and reinsurance types.
It has been difficult to measure the use of third-party funds with the traditional insurance and reinsurance markets, and this may become more common over time, as third-party funds and ILS strategies become more common.
The risk market and the ILS fund manager’s assets are easy to calculate, but researching how third-party funds support insurance-type businesses can be confusing, as these are not well defined.
Also, the lines between ILS and other uses of third-party capital may be difficult to define, as the methods of accounting for more, hybrid capital of commercial insurance companies and reinsurance companies continue.
There’s a lot to be said, technically, for designing the best payment models, architectures, and delivery methods.
We’re seeing this in all areas of insurance and reinsurance now, from the software business, to casualty, insurtech (as evidenced recently by Accelerant), to commercial insurers and general insurers.
Marketers, too, are very concerned about how to build relationships with traditional companies, at this time.
While brokers must also blur the lines, as they continue to make money for themselves and build relationships with investors, through risk management.
The current disaster may cause insurers to re-evaluate how they can achieve this, leading to new ways to use third-party funds along with their records.
Of course, we’ve seen this before, where business preferences change from one ILS, or partner/manager, to another and we’re likely to see them again, as investment continues to grow in the market.