De-risking to growth
Uncertainty is driving demand for strategies removing risk from a carrier’s portfolio, TigerRisk execs say.
By Mark Richardson, London Editor
Actions to de-risk portfolios will continue to be high on the agenda of re/insurers in the coming months, executives from TigerRisk believe. De-risking strategies have long been essential tools for taking on new business while capping the level of risk held on the balance sheet.
Where earnings are looking more volatile, Wade Gulbransen, TigerRisk’s Head of North America, tells the Rendez-vous Reporter, firms will begin to inspect the level of risk on their balance sheets more closely – be it catastrophe risk, reserve risk, interest rate risk or aggregation risk.
Various players across the industry have already taken to raising capital this year to shore up their solvency position in the face of an expensive claims year; reinsurers have seen an increase in demand; and other de-risking measures have also subsequently become more prevalent.
“We look at what causes the earnings volatility,” Gulbransen says, when explaining how TigerRisk approaches finding the best solutions for clients.
Having focussed on de-risking in the cat space in the early years of TigerRisk, he says the firm has since expanded its skill base to also address reserving risk, and assist with capital raises.
“When we think about de-risking strategies we look holistically across a company’s risks,” he says. “If you think about de-risking today compared to this time last year, there is more uncertainty today.”
However, while COVID-19 losses have been a significant source of uncertainty for risk carriers, Gulbransen does not put this as the only reason people want to de-risk.
“The reality is there was de-risking occurring well before COVID-19 happened,” he says. “People saw signs they had to start reshaping their portfolios due to some loss development on their views of what 2015-2018 would be for casualty lines.”
Besides this, he says the pain of cat accumulation over the last few years has been a factor, pointing to higher levels of de-risking that started to occur soon after the 2018 California wildfires.
This de-risking that had been occurring pre-2020 was from a risk tolerance perspective, he says, whereas uncertainty is the now the main driver.
“Today people are de-risking because there is so much uncertainty around what’s going to happen with the economy, what’s going to be the impact of COVID-19, and cat volatility - with 2020 being so far being above average, certainly for North America cat,” he adds. “So de-risking is going to continue.”
Gulbransen says TigerRisk saw several new companies come into the market at mid-year which decided to buy down their retentions due to concerns over increased volatility and reduced profits.
“Confidence and profits bolster views of what level of risk companies are willing to retain and as those components diminish, as your fear of not making profits increase, your appetite for taking risk goes down,” he explains.
In particular, Seth Ruff, FCAS, Partner and structured risk specialist for TigerRisk, says the pipeline for legacy transactions as a de-risking option has expanded exponentially.
He points to a PwC survey showing that in the last two years close to 100 legacy deals have been completed. In the past year especially, he says the space has been “ultra-active."
And he puts the increased number of deals not only down to the increased demand for covers, but also the increased supply of reserve protections.
“What this is doing is creating a super-fertile environment to get these deals done,” Ruff says. “In earlier days people were hung up on the execution risk around reserve covers and had a feeling the chance of failure was too high. Now these deals get done, and that fear of execution risk has reduced.”
A big change has also come in the perception of these deals. Rather than being seen as admission of failure, the sale of legacy books is now viewed as an efficient way of generating capital, Ruff says.
Current market conditions, with low interest rates and an improving pricing environment, are making this option more attractive.
“There is real pressure on earnings,” Ruff says. “Historically earnings had been driven by reserve releases and investment income, but right now yields are terrible.
“Already portfolio yields were getting sucked down based upon those new money yields being so terrible, and then add to that a lot of those great reserve releases were drying up and so what do you do?”
The answer for many according to Ruff is turning to new business growth to find profit. To take on new risk, carriers need capital, and Ruff says releasing funds tied up in old reserves is now a popular capital raising measure.
“The market conditions have shifted,” he adds. “On earnings calls everyone is saying that opportunities for new business underwriting is better than anything seen in a decade. Legacy solutions are one of a number of ways you can go and try to take advantage of that.”
