Aon's new cat facility points to ILS ambitions from backers
Swiss Re and PartnerRe have backed a new Aon cat distribution facility that will feature alternative capacity as well, in what could be a signal of both carriers' ambitions for broader ILS platforms.
At present, both firms' third-party capital businesses are heavily geared towards specific sidecars rather than offering a suite of products to investors.
Through the new facility, Marilla Swiss Re and PartnerRe have agreed to take 4% of cat excess of loss (XoL) business placed by the intermediary. The news was first reported by Voice of Insurance.
Alternative capital would reportedly form part of the facility, but to what extent remains unclear.
However, at least one potential provider can be excluded, as major ILS investor PGGM, which provides capital to both reinsurers on the facility, is understood to have no participation in Marilla.
Aon has pitched the facility as one that can provide a beta/index-like return across the cat reinsurance market, given its breadth of coverage as one of the top two dominant brokers.
Fronting some business for investors within a facility like this could be an intriguing option.
It's difficult to assess whether it would really fit the bill as a low-cost beta/index strategy because comparing an additional brokerage charge to management fees is not using like-for-like jargon, and you'd have to know how much of a fee the reinsurers would load on top as well.
But 2.5 points of extra brokerage may seem worthwhile if other administrative costs could be lowered.
Meanwhile, some may see the facility as a bearish signal for the broader catastrophe market.
From a broking and ceding perspective, the timing should help what might be a challenging renewal in January 2021, as it lines up follow-form capacity for Aon’s clients at a time when carriers are restricting their cat risk appetites and it also enhances Aon’s commission.
But from the reinsurers' perspective, the strategy is more unexpected. Amid the first major rate upswing in years, what is driving Swiss Re and PartnerRe to sign up to pay an extra 2.5 points of commission to secure this share of business?
Both are major longstanding names (with strong ratings of A+ for PartnerRe and AA- for Swiss Re, large capacity, and established global client relationships) who you would not expect to have difficulties getting onto programmes.
Both carriers have signalled they are keen to secure growth in this rising market, but the implication is that they fear market capacity is too healthy to enable them to elbow past competitors without the distribution boost from this kind of facility.
After all, carriers have shrugged off Covid losses and most of the pricing gains are expected to come from reassessments of risk and target return than actual capacity shortages (at least in reinsurance rather than retro).
They might be bargaining on the fact that this facility will be able to help them achieve a broad spread of business rather than having to grow more on poorer-performing accounts.
Or they may hope that the additional brokerage will be offset by price cutting they would have to do to grow sufficiently in the absence of a distribution support.
Regardless of these tactical concerns, the overall point remains: this is a bearish signal for cat reinsurance, if even blue-chip names don’t think they can grow as they want to in this market.
Swiss Re and PartnerRe's caution around securing target growth does somewhat undercut the idea that post-pandemic rate rises will have a long runway, and may help release some pressure as it should make placements a little easier.
Beyond the general bearish signal that it sends, it also creates a specific concern around deploying and gaining access to risk for the newer carriers and start-ups such as Vantage, Inigo and Conduit, should the latter get off the ground.
Aon confirmed that Marilla had been launched with a view to bringing “additional high quality automatic capacity” to its clients' global property risks.
“Marilla’s innovative structure will deliver more efficient risk transfer to clients and distribution to the market, and, uniquely, will seek to utilise both traditional and alternative capital sources,” the firm said.
PartnerRe and Swiss Re have declined to comment on this week's news, but one can imagine that the move has sent some waves of nerves through a market hard at work on pre-1 January renewals.