‘The capitalisation of the reinsurance industry in five years’ was the topic discussed a panel of industry leaders at the ILS Bermuda Convergence 2014 conference at Pier Six yesterday.

The moderator for the discussion was Paul Schultz, chief executive officer (CEO) at Aon Benfield Securities.

Sitting on the panel was Anthony Rettino, the founding principal and portfolio manager of Elementum, Marc Grandisson, CEO reinsurance at Arch Capital Group, Lixin Zeng, CEO at Alphacat Managers Ltd and Costas Miranthis, CEO at Partner Re Ltd.

Held in the futuristic tent structure that sits on the Pier Six roof top, the session opened with Mr Schultz prefacing his questions with the statement that reinsurance today is largely funded by equity, and noted: “From ten years ago to today, that percentage has remained very constant.”

A vigorous discussion saw the panel largely agreeing that they did not foresee much change to the capitalisation of the industry in the foreseeable future.

Among the points that panellists made during the morning’s session included:

— The search is for the most efficient products, and to achieve that, transparency is key.

— ILS are efficient, but unlike traditional reinsurers, the product is a commodity, and the information that went into creating it does not remain with the product as it is bought and sold.

— Alternative risk transfer products tend to be for the short term.

— Traditional reinsurance allows for long-term relationships, which is desirable for both the reinsurer and the client. The relationship that evolves helps the reinsurer develop the best solutions as they learn more about their client. For the client, the result is a better product. The client becomes increasingly willing to share information with business partners the more established the relationship, but wants to be certain that information is held confidentially.

— Clients want to know that their reinsurer has enough ‘skin in the game’ because that aligns the interest of the reinsurer with that of the client. Mr Rettino said: “We very much believe we are in the business of assuming risk.”

— Clients need to know that the reinsurer will be there to pay.

— The higher cost of capital is because reinsurers’ financial statements are ‘opaque’. “I think we can do better,” said the Elementum executive.

Mr Miranthis said: “What we do is we assume risk and we distribute risk — the question we have to face is: ‘What is the most efficient way to do this?” He added: “We’re in business for our equity shareholders. It’s all about efficiency — it’s all about the cost of transferring risk.”

Mr Zeng told the audience that while ILS are efficient, “I don’t think there is an alternative to traditional capital.”

And Mr Grandisson noted: “The (insurance) structure that is there, has been around for hundreds of years.” He added an industry has built up around it, including in areas of compliance and case law.

However, the industry is looking for creative solutions and innovators. Mr Grandisson said: “We’re creating choices and choices are good.”