Alternative Capital Making Inroads in the Reinsurance Market

In a Q&A in Captive Insurance Magazine, Aaron Koch discusses the alternative insurance market. The most common form of insurance-linked security is the catastrophe bond, tradable securities that pay a fixed coupon. The investor puts up a fully collateralized coverage limit that is held in trust. If a triggering event occurs, the money is released to the bond seller. Investors have created a number of other reinsurance-related instruments, some of which go beyond ILS. Hence, the term “alternative capital” has come into use to describe the phenomenon of “financial investors writing reinsurance.” The alternative capital market took off following the series of major hurricanes in 2004 and 2005, and has grown from $12 billion in written coverage to about $70 billion. The traditional reinsurance market has responded by reducing prices, loosening terms and conditions, and consolidating. There is still a lot of capital looking to enter the market, which will grow through product innovation including specialty insurance transactions and efforts to bring liability risk to the ILS market. According to Koch, “ILS provides a powerful new tool for transferring catastrophe risk.”