Mitchell Rosenberg on why the line between traditional and alternative capital is blurring
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Alternative capital has become a permanent part of the reinsurance market. Now, the distinction between alternative and traditional capital is starting to blur.
Mitchell Rosenberg, Co-Head of Global Insurance-Linked Securities (ILS) at Howden Capital Markets & Advisory (HCMA), joined Meg Green of Insurance Insider at the Rendez-Vous de Septembre in Monte Carlo to discuss how alternative capital is changing the reinsurance market and where the next phase of growth could come from.
As investors become more sophisticated and structures evolve, the conversation is shifting from where capital comes from to where it can be put to work.
A permanent source of capital
Alternative capital has moved well beyond its early role in the market.
“Over the last several years, it's really become a permanent source of capital that insurers and reinsurers have been able to rely on, starting most principally with property catastrophe risk, but that’s since evolved over time," Mitchell said.
For insurers and reinsurers, that evolution has opened the door to a broader investor base. It has also created another way to assess the cost of risk transfer.
“Most critically for insurers and reinsurers buying risk transfer capacity, it provides another source of price marking to understand what the cost and what the most efficient market is able to be supported by their ultimate product," Mitchell said.
Where could growth come from next?
Mitchell sees more than one direction for the market.
“There's probably three areas," said Mitchell. "One, still plenty of runway on the property cat side of the equation, where cat bonds have obviously come a long way.”
But the opportunity is extending beyond property catastrophe.
“There's been a lot of effort and transactions taking place on longer-tail casualty, whole-account specialty," Mitchell said.
Investor behaviour is changing too.
“As investors have become more sophisticated, and they've been trading in a way akin to traditional balance sheet capital, that's really starting to expand across all lines of business," Mitchell said.
New risks need new structures
Expanding into new areas brings a structural challenge. The model that has worked for property catastrophe won’t necessarily work everywhere else.
“Not every risk kind of fits nicely into the perfect structure that the cat bond has done exceptionally well for property cat risk, which is discrete," said Mitchell. "It’s short-tail, it resembles a product that capital markets historically have invested in.”
For Mitchell, the next phase depends on structures that work for both sides of the market.
“Insurers and reinsurers are looking for efficient, flexible, long-term capital, and then investors are looking similarly for alignment of interest," said Mitchell. "They’re looking for an appropriate risk-adjusted return for whatever they’re assuming in the line of business and, ultimately, a partnership-driven product and solution.”
He expects those structural advances to bring investors, insurers and reinsurers closer together.
Where does alternative capital go from here?
As structures develop and investors become more sophisticated, the distinction between traditional and alternative capital could become less important.
“Over the next several years, what you're going to see is that line just continues to blur between what we call alternative capital and traditional balance sheet capital," Mitchell said.
Where that leads, and how the market decides which capital is best suited to which risks, is the next part of the story.
Watch the full Insurance Insider On Air interview to hear Mitchell discuss the areas he sees with the greatest potential for growth, the structural challenges that still need to be solved and how the relationship between alternative and traditional capital could evolve.