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Reinsurance Markets, Captives, and Generative Thinking

globalmarket
September 25, 2014

By John Foehl

Over the last month Captive Wire has highlighted a series of headlines suggesting that the fundamentals underlying the global reinsurance market are changing. Fitch published a report arguing that alternative forms of risk transfer, such as insurance linked securities (ILS), are gaining acceptance by both cedents and primary reinsurers. Fitch stated, “the growth and acceptance of alternative reinsurance is a strain on the credit quality of reinsurers, especially for smaller, stand‐alone property catastrophe providers.”

A.M. Best followed up with a report titled “How Relevant is the Underwriting Cycle.” In Best’s opinion capital continues to flow into the reinsurance markets even though they believe that fundamentals are moving in the wrong direction. Best also notes the increasing use of insurance linked securities. A.M. Best recently revised its outlook for the reinsurance industry from stable to negative.

Price Waterhouse Coopers (PwC) has a report out called “Reinsurance 2020: Taking Control of Your Destiny.” It believes that a period of cost cutting and consolidation is likely for the reinsurance industry as a result of a combination of factors including:

  • Low interest rate environment
  • Limited growth opportunities
  • Declining margins
  • Growth in catastrophe bond issuance

Finally at the Monte Carlo Rendezvous Standard & Poor’s (S&P), as part of its global report on the reinsurance markets, issued a piece titled “Global Reinsurers: Innovation and Adaptation are the Key to Relevance.” The article calls for reinsurers to fundamentally reinvent their business models to stay relevant in a rapidly changing environment. But why should captives and their owners be concerned about the changes occurring in the global reinsurance markets? Increasing reinsurance market options, coupled with lower reinsurance costs, would seem to be naturally beneficial to the captive market. But just as the captive industry disrupted the primary commercial insurance business model, changes in the reinsurance markets could alter the dynamics for captives in the future.

However, trying to determine what those dynamics are and what they mean for captives can be daunting for many captive owners. One way of approaching this question is through the use of generative thinking. Generative thinking has been described as a step beyond strategic planning. It is an attempt to be able to ascertain “what is over the hill” or “around the bend in the road” that could have implications for the company doing the thinking.

In the next article we will explore generative thinking in greater detail.

John Foehl, who is coeditor of Captive.com, currently serves at the president and CEO of Government Entities Mutual, PCC, a member-owned captive reinsurance company.

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