Page 10 - 2016 State of the Market from AmWINS

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FEATURED TREND: ALTERNATIVE CAPITAL
There continues to be an influx of alternative capital across the industry. We asked W. H. “Skip”
Cooper, president of AmWINS Group, Inc., what this new reality means for the market.
It’s a broad term used for money that is being invested from sources
such as pension funds or university endowments directly into
risk applications. Historically, if those funds wanted exposure to
insurance risks, they invested in the stock of insurance companies.
However, these investments entailed taking equity market risk in
addition to insurance risk. By accessing insurance risk directly,
alternative capital eliminates the equity market exposure. Most of
these sources of capital invest in the space through investment
vehicles called insurance-linked securities (ILS) funds.
Alternative capital levels in the insurance industry have grown
rapidly in recent years and are currently in the $70 billion to $75
billion range; this amount is expected to continue to increase.4
According to a recent McKinsey report, the pool of available
capital from alternative sources (i.e., total of global managed
assets) is estimated to be as high as $100 trillion. Assuming that
the allocation to ILS funds could eventually reach 3 percent,
that would imply $3 trillion in available capital. For comparison,
the traditional insurance industry’s estimates of total capital
and surplus is approximately $670 billion, with global property
catastrophe limits in the $300 billion to $400 billion range.
Definitely. Institutional investors have recognized the benefit
of portfolio diversification and the ability to get a measurable
expected return on investment in the insurance space. As you
can see from the numbers above, the portion of global asset
funds currently invested in insurance risk is a small fraction of the infrastructure.
capital these funds could be allocating to the market. And, while
a very small percentage of global assets allocated to insurance
can become a very significant portion of the total funds within our
industry, it is still a relatively small amount and a non-correlated
diversification tool for these large funds.
Because alternative capital views the insurance space as
non-correlated to other investment options, it has the ability to
be less expensive than insurance industry risk transfer in two
ways: required return on capital levels and cost of distribution
of their capital (product) to risk. And, as the capital market
sources become more familiar with the insurance space, they
4 Insurance Information Institute
are able to become even more creative in distribution of their
capital (product) to meet risk needs and offer broader options for
insurance buyers. However, since this source of capital has no
fixed infrastructure costs to support, we believe that they will not
continue to support the market once the modeled pricing doesn’t
deliver their targeted returns.
Alternative capital is evolving and growing rapidly. Originally,
alternative capital was primarily utilized as reinsurance, typically
through structured securities such as catastrophe bonds and
industry loss warrants (ILW). One advantage of participating in
the reinsurance marketplace was the lack of financial reporting
and regulatory filings with which to contend. In addition, these
capital sources didn’t have access to insurance carrier paper
to issue actual policies. As the supply of alternative capital
increased, yields on cat bonds fell dramatically and ILS funds
began looking for more efficient ways to access the direct
insurance market.
Thus, over the last few years, alternative capital has become
available to direct buyers of insurance through regulated
carriers, products, and risk transfer mechanisms. These new
capital sources offer a cost advantage over traditional markets
in part because they aren’t investing nearly as heavily into
internal distribution, branch networks, or policy execution
infrastructure as have traditional insurance carriers with legacy
Without having the distribution infrastructure of traditional
markets, alternative capital is relying heavily on wholesalers and
MGAs to identify opportunities that match a desired risk profile.
The good news for retail agents is that they and their clients
can sit directly beside the wholesaler or MGA to gain access
to products and capacity provided by this new capital source.
AmWINS is on the leading edge of understanding and developing
such products, and is constantly establishing relationships with
leaders in this space. AmWINS’ objective is to be a resource and
conduit to help retail agents and brokers better understand how
to utilize capital market funds to provide better products and
programs for their clients.