With almost $35bn raised since Hurricane Katrina, much of it from the capital markets, the industry must cater to this important source of capacity, explain Jean-Bernard Crozet and Colum D’Auria
THE RECENT WAVES OF capital raising (via new start-ups, securitisation and sidecars) have brought demanding, quantitatively-minded capital markets investors to the reinsurance market; but with new capital comes new accountability.
These new investors are transforming the traditional relationships between reinsurers and their capital providers. They expect high levels of business transparency and demand assurance that the risks assumed are fully understood and mitigated effectively by management. Crucially, they require evidence of this to be communicated swiftly and concisely.
Investor reporting has traditionally focused on business volumes, regulatory compliance and accounting figures, but has provided little information on key issues such as the controls environment, cycle management or the quantification of risks being taken.
A perfect example is the assessment of catastrophe exposures. The reporting of the 2005 hurricane losses has painfully highlighted that not all reinsurers have as good a handle on their exposures as they thought. Investors want to be able to separate the wheat from the chaff quickly before they commit to an investment. Reinsurers therefore need to show-case robust processes and controls for managing of their catastrophe aggregations, if they want full access to the capital markets.
The pressure is now on reinsurers to turn investor reporting on its head, and transform it into tailored investor packs focused on more specific key performance indicators and supported by qualitative commentaries.
Much of the raw material is already to hand. The challenge is to collate this information rapidly and mould it to the requirements, and into the language of, capital market investors.
It would be a mistake, however, to think of tailored investor packs as just another reporting burden. They can provide constructive insight to senior executives, and become a key differentiator from the competition, not only from an investor’s perspective, but also in the eyes of other stakeholders such as rating agencies and regulatory bodies alike.
For the well-managed reinsurer, tailored investor packs readily offer the potential for significant gainfor relatively little effort. Whether these become the market standard remains to be seen, but a window of opportunity exists for those who open it.