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Third-party capital management not for all reinsurers

Reinsurers should take advantage of alternative market capacity but it is possible to "survive nicely" in the industry without managing third-party capital, Validus CEO Ed Noonan said last week.

During a panel discussion at the 2013 Bermuda Reinsurance Conference, Noonan said that Validus felt it had more power over pricing conditions due to its control of alternative capital through its managed funds division AlphaCat. He added, however, that this would not be every company's strategy.

He urged the industry to use the ILS market for "capital consumptive" high-layer risk and to hedge portfolios by purchasing retrocession from providers with a lower cost of capital.

Third Point Re CEO John Berger said that everything happened much more quickly in today's market than previously due to the flexibility of capital and the big pool of capital on the sidelines or "people with their noses pressed up against the window wanting to get in".

However, Noonan also said he felt the alternative reinsurance market needed further testing before it could be shown to be a perfectly viable product, particularly in terms of collateral lock-ups.

He said that the fact that the reinsurance industry's main risk period falls towards the end of the year in the September-October peak of the hurricane season meant that there was increased potential for collateral to be locked up ahead of a 1 January renewal.

Further significant consolidation is unlikely to take out excess capital in the P&C reinsurance sector, the panel agreed.

ILS Capital Management chairman Don Kramer said that cedants wanted diversification among their reinsurance counterparties, which meant there was limited potential for significant M&A activity between reinsurers.

Noonan agreed, saying that further acquisitions would have diminishing returns for Validus, which scooped up Flagstone in 2012.

"[M&A activity] won't take the excess capital out of the business, that will be mostly at the margin."

The panel also said they considered the rise of broker placement facilities to be a soft market phenomenon.

Noonan said that it could make sense for carriers to pay brokers extra fees to see their entire book of business, but that the notion of underwriting rested on the ability to select risks.

He said that taking set percentages of broker-placed risk meant that carriers would be following the weakest underwriters.

"You're just dumb drone capital," he said. "Most of them will come to tears as a result."

However, Kramer pointed out that Berkshire Hathaway - which set up a passive underwriting facility with its Aon Lloyd's "sidecar" this year - is in a different position to many reinsurers because its size means it can afford to be insensitive to volatility.

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