This issue of Global Reinsurance takes a look at the alternative risk transfer (ART) market. For several years, the ART market has been slow, and several commentators suggested that its development was being quashed by the soft conditions in the traditional re/insurance markets. Come the hard market, come the ART market, was the suggestion.
The hardening has, indeed, happened, but ART appears to remain a marginal sector. Several deals have taken place, but mostly they continue to focus on the high profile natural catastrophe events such as US quake and hurricane, Japanese quake and windstorm, and European windstorm, in what are now fairly standard transaction forms. Nevertheless, SCOR's ¤130m HORIZON placement in April smooths the French reinsurer's credit reinsurance exposures, while in May Swiss Re Capital Markets used collateralised debt obligations to manage a variety of catastrophic exposures.
Of course, accurate measurement of ART activity invariably depends on what is included within the term. Captives - seen by some as ART-type vehicles - are currently seeing a strong surge in activity. This issue of Global Reinsurance publishes the results of a recent survey of European captive managers' business. Most report a rise in business, with new formations and increased volumes through existing captives since the middle of last year. Parent companies are using their captives to manage the greater retentions and tackle the higher premiums currently characterising the traditional re/insurance market, and captive managers are noting that their clients are more demanding greater control over their own risk destinies.
Business on the rock
Guernsey continues to be the largest - and largest-growing - captive domicile in Europe, and was the first domicile in the world to introduce protected cell company (PCC) legislation. In a bid to stimulate its captive business, Gibraltar, a British territory at the southernmost point of Spain, has also introduced PCC legislation, and claims that its ability to write business across the European Union through `passporting' will give it an edge over Guernsey. Whether this is truly the case remains to be seen; for years Spain has been battling to have the territory returned to its rule, and there have been sotto voce claims that Spain has quietly blocked pan-European business being transacted from Gibraltar. This has not, however, deterred Aon Insurance Managers from setting up a new PCC manager in Gibraltar, and the current general concord apparent between the British and Spanish governments may encourage the business opportunities.
Captives also remain a fulcrum of the Dublin financial services community, and its desire to become the `Bermuda of Europe' seems to be several steps further on. Dublin's reinsurance sector has grown substantially in recent months, and several of the new Bermudians, formed in the wake of September 11, are centring their European operations in the Irish capital. AXIS Specialty is already writing business out of its Dublin operation, and Platinum, the recently-announced Bermuda-based successor for St Paul Re's business, has set up a holding company in Ireland, according to a recent Securities and Exchange Commission filing. Allied World Assurance Co, which currently is operating in Europe through a contact office in London, is thought to be looking at setting up a Dublin operation, and there are suggestions of several more licensing applications being in front of the Irish regulator. Claims that Dublin is starting to challenge London as an international re/insurance centre are certainly erring on the side of hopeful, though Dublin is increasingly providing a home for specialised writers, including life reinsurers such as Canada Life Re and Transamerica International Re, and the new breed of companies such as Max Re and Imagine Re. London, however, remains the European home for big programme business, and certain Lloyd's syndicates are making the most of the opportunities they are being presented by entering into quota-share arrangements which effectively help to increase their capacity.
With more than $20bn in new capital into the industry over the past few months, and with an increase uncertainty in risk profiles, the development of the ART market may have been stunted. It is still a new sector, part science, part art, and assessing its role in results smoothing will remain impossible until what it is encapsulated in the term `ART' has become better defined. Even so, the modern ART movement continues to develop.
Sarah Goddard is the editor of Global Reinsurance.