AXIS CEO: Third party capital means ‘opportunity’ to offer cheaper reinsurance

Third party capital can help reinsurers lower the cost of capital and therefore coverage and this should be seen as an attractive business opportunity, according to AXIS Capital CEO  Albert Benchimol.

Third party capital is here to stay, it has an appetite for risk and it wants to participate in the risk transfer universe, Benchimol said at a Feb. 15 presentation at the Bank of America Merrill Lynch Insurance Conference.

“We believe, it’s a real opportunity for us to make that capacity, at the returns that that capacity wants, available to our customers,” Benchimol said.

Third party capacity is available in abundance through various structures allowing coverage to be offered at a lower return than traditional reinsurance, he explained.

“We believe that our job is to make that capacity and those prices available to our customers but wrapped with the service and customization that reinsurance requires,” Benchimol said. “That’s a strategy that worked very well for us,” he added.

AXIS currently has $1.9 billion worth of third-party capacity in terms of capital at its disposal, 55 percent of which is targeted towards cat risk and the rest to more diversified non-cat lines.

In 2017 the re/insurer ceded to its third-party partners $489 million of business and generated $36 million of fees in the process. This business has grown from $105 million premium ceded to strategic capital partners in 2015, generating $8.5 million in fee income.

“Our customers get the capacity they want at the best rate available,” Benchimol commented. Our partners and third-party capital get a great portfolio at the market price that they want and we generate fees in the process,” he explained.

Many market participants blame alternative capital for causing overcapacity in the reinsurance market and pressuring rates down to unsustainable levels.

Following 2017’s record natural catastrophe losses commercial property insurers are seeking double-digit rate hikes on catastrophe-exposed insurance programmes, according to Willis Towers Watson.

However, abundant risk transfer capacity in the form of traditional and alternative capital is dampening the potential for widespread market firming.

Rate increases in the January 2018 renewals were lower than expected after the significant natural catastrophe losses of the third quarter of 2017, according to a JLT Re market report.

JLT Re’s Risk-Adjusted Global Property- Catastrophe Reinsurance Rate-on-Line (ROL) Index rose by 4.8 percent at Jan. 1, 2018, with levels still below those seen in 2016.

But Benchimol does not believe that the price pressure is caused by overcapacity, suggesting instead that a lack of underwriting discipline more generally is the culprit.

He pointed to rising loss trends in casualty and higher amounts of class action suits in professional liability. Some of these volatile lines have seen aggregate price cuts in excess of 50 percent. “I think everybody knows that the level of profitability in this industry is simply not acceptable,” Benchimol said.

But price increases in the range of 15 percent, 20 percent or even 25 percent as seen in the past will not happen anymore, Benchimol believes. They are more likely to remain in a similar range as seen in the January 2018 renewals in lines of business where they are required while others might not see them at all.

“You have to position yourself in today’s pricing environment which is what we did at AXIS,” Benchimol said.

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