Why re/insurers must woo ILS investors: Guy Carpenter

“It takes two to tango.” That is how Laurent Rousseau, chief executive officer of EMEA and Global Capital Solutions, Guy Carpenter, describes the relationship between investors and cedants seeking to increase their access to capital markets. But, he adds, the depth of that relationship needs to continue to increase. 

“Securitised insurance risks remain a tiny component of the overall financial markets. If the re/insurance industry is to build the capital scale needed to manage the rapidly expanding universe of risks, further changes need to be brought to the insurance-linked securities (ILS) market,” he told Intelligent Insurer. 

“To achieve this, we must amplify the intrinsic value of insurance risks to the investment community as both an uncorrelated asset class and one which facilitates greater portfolio diversification, in a transparent and cost-efficient way. It is also an effective way to contribute to climate change resilience.”

He stressed that education is the key to elevating the role of the capital markets to another level to support re/insurance risks and noted that insurance contracts are nowhere near as standardised as financial contracts. 

“There’s more work to be done around transparency, explanation, simplification, and standardisation to translate finance mechanisms for the insurance market. Parametric covers are a key area of progress. 

“But it takes two to tango—there must be greater understanding and more work done on both sides.”

A new role

Rousseau was speaking in the context of the importance of creating better alignment between both sides of the market when it comes to matching asset pools with risk pools. This is a large part of his job now. The former CEO of SCOR took the reins of Guy Carpenter’s Global Capital Solutions business (he also heads its European, Indian, Middle East and African business) in June 2023. 

In June this year, the scope of his remit broadened even further when the broker launched a dedicated capital and advisory unit within Rousseau’s Global Capital Solutions group.

On the formation of the new unit, he said the company wanted to ensure it could access all forms of capital interested in participating in insurance. 

“Bringing new capacity to the market should be at the core of what a broker does. We need to consider how we can raise broader forms of capital for our clients.”

“A key facet of my role is to engage with capacity providers.”

He said the types of investors interested in the space have evolved. There has been a rise in alternative asset managers and institutional investors, for example, and different investors want to engage with insurance in different ways. While the go-to investment instrument is typically considered cat bonds, he stresses that there are many other ways in which capital can play in insurance—and that cat bonds are only part of the ILS world, never mind the wider investment universe.

“A key facet of my role is to engage with capacity providers and the capital markets in particular to find ways to make that happen,” he said. “The cat bond market has deepened and broadened in the past 10 years, but there is still a long way to go to make most insurance risks an investible asset class.”

“Although cat bonds have reached record levels in recent years, predicted to reach $50 billion this year, they remain only a small part of the overall fixed income investment markets, where trillions of dollars in investments are managed. 

“It is certainly true that there remains a lot of growth potential in cat bonds alone,” Rousseau said. “But the key is enabling investors to invest in other lines of business as well, whether it is cyber, casualty, surety, etc. There are structures that are more equity-like, such as sidecars and reciprocals. In that sense, the investments we are seeing could be much bigger.”

He adds that there is huge potential in securitising life risks following the COVID-19 pandemic and interest rate increases. “Our industry tends to forget that the life industry is much bigger than the P&C industry, plus it has been going through much more radical change with financial investors willing to consider taking on liabilities on a large scale. 

“This hasn’t happened on the P&C side in the same way, but it definitely could,” he said.

He also notes that, in the traditional reinsurance market, higher reinsurance rates have led to increased demand for alternative risk transfer. 

“More expensive reinsurance, focusing on severity risks and less on frequency risks, does result in more people considering alternative solutions,” he said. 

“Finding solutions to support insurers facing frequency risks will be key.”

“The idea of what we call ‘alternative’ structures has been around for a long time. There has been little innovation in the structures themselves—multi-year, multi-class structures, with less risk transfer and more financing. 

“There is an increased demand, but reinsurers’ appetite has been muted. Finding solutions to support insurers facing frequency risks will be key.”

Being a broker

Commenting on his switch a year ago from reinsurer to broker, Rousseau has been enjoying the learning curve—and describes it as a natural progression. “I started as an investment banker servicing the insurance industry, and then became a reinsurer. My current role is a combination of the two stages in my career. Especially on the capital solutions side, it is a natural combination of both. 

“It is nice to be back in London, which is such a vibrant marketplace.”

He believes the role of the broker is changing rapidly— in a way that suits him, and he wants to contribute to. “The whole broking business and the distribution around it is at a tipping point. All intermediation businesses have to embrace technology, be data-driven and deliver seamless execution. They must refocus on what is truly value-adding, advice, and strategic insights, versus what is commodity.”

He believes this is even more relevant in reinsurance, where even some of the biggest players have increasingly outsourced distribution to their brokers. 

“Carriers are focused on the risk-bearing aspect and addressing increasing regulatory complexity. That makes the role of the broker more important than ever. But that also makes it a good time to be a broker, to deliver that distribution and offer added value to clients and insureds.”

Such a statement echoes his core message in Monte Carlo this year. “It’s going to be about client differentiation, in a capital-abundant market. Reinsurers will have to work a little harder because insurers will face broader options. They will need to be more thoughtful and strategic in terms of how reinsurance capacity will be allocated.”

For more news from the Rendez-Vous de Septembre (RVS) click here.

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