Finite reinsurance and reinsurance, so-called convergence products, are the wave of the future in the property-casualty industry, according to a new study.
Stephen Christiansen, research director at Conning Research and Consulting, which put out the report, said p-c insurers have been moving away from individual cause-of-loss coverages to non-traditional products such as capital markets financing solutions and finite reinsurance.
"The size of the convergence segment is relatively small, yet the longer term trends are lining up in favor of these products," Mr. Christiansen said.
Primary and secondary insurers' ability to adapt to these trends will play a key role in their survival in the coming years, he predicted.
Increased interchangeability of capital along with a movement toward a more holistic approach to risk and capital management are among the factors prompting this trend, according to Hartford, Conn.-based Conning.
"The ability of capital to enter the risk management marketplace rapidly is reducing the insurance industry's ability to sustain adequate profits during the hard market cycles that help them overcome inadequate returns during soft cycles," the report states.
Reinsurers and reinsurance brokers are in the vanguard of the development and distribution of these products that also include multiline loss triggers and post-loss financing solutions.
The report asserts that the expansion of the insurance industry into balance sheet and capital management products is part of its evolutionary process.
"In the past two decades, insurers and reinsurers have developed several products that more directly address business needs for balance sheet efficiency," the report said.
Many of these products have increased customer value over traditional insurance with features such as lower costs or reduced credit risks.
The report lists finite insurance and reinsurance as among the coming products for the future, although in the short term they are falling into disfavor somewhat due to increased regulatory scrutiny due to some cases where the transactions have been misused to improperly burnish financial statements.
"Growth in finite reinsurance products likely will follow increased reporting guidelines from regulatory entities," the report said.
In general, constantly changing regulatory oversight has been a hindrance in the development of these products with concerns being accounting treatment, solvency issues and market conduct, according to Conning's analysis.
"The use of convergence products can change the risk and capital needs for both buyer and provider, requiring regulators and financial rating agencies to understand their solvency impact fully," the report said.
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