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Jass joined Augment Risk in early 2023, and with around a decade of industry experience, has focused on all areas of esoteric reinsurance, from insurance-linked securities (ILS), legacy, Funds at Lloyd\u2019s, to the structured credit space.<\/p>\nIn a recent interview with Reinsurance News, Jag Jass, Partner – Retrospective at reinsurance broker Augment Risk, explained that while there will always be a place for larger transactions targeting toxic liabilities and discontinued lines of business, legacy is best used when dovetailing an approach from a prospective and a retrospective standpoint.<\/p>\n
Jass joined Augment Risk in early 2023, and with around a decade of industry experience, has focused on all areas of esoteric reinsurance, from insurance-linked securities (ILS), legacy, Funds at Lloyd\u2019s, to the structured credit space.<\/p>\n
Now, at Augment Risk, he leads the retrospective division at an interesting time for the legacy, or run-off universe, as the focus shifts to more than just reserve protection and market participants work to improve its perception.<\/p>\n
To start, Jass explained how Augment Risk views the legacy re\/insurance space.<\/p>\n
\u201cIt was no secret that when we set up the legacy division at Augment Risk, we wanted to do things slightly differently, and really to embed it as part of our overall capital offering,\u201d said Jass.<\/p>\n
Legacy, in its truest form, over the past decade or more, has largely been a means of transferring what Jass described as \u201ctoxic liabilities\u201d or \u201cdiscontinued lines.\u201d But at Augment Risk, the view is that legacy reinsurance should be used in the same way that traditional financial institutions leverage options and forward contracts as hedging tools to offset any underperformance.<\/p>\n \u201cSo, when you take our structured prospective division, who holistically address capital requirements for their cedents, reducing regulatory and rating agency capital on a prospective basis. But when you dovetail that with a retrospective structured solution, you have this back-to-back benefit for the client, and they benefit from the ongoing capital efficiency. They operate in a streamlined way, and they’re able to recycle capital.<\/p>\n \u201cOne of the phrases we always use is, you’re unlocking capital to fuel organic growth. If you look at an insurer’s balance sheet, they have three levers of capital: debt, equity, and reinsurance, which is more of a contingent capital tool,\u201d he said.<\/p>\n In the current market with elevated interest rates, it\u2019s been expensive to go out and raise debt, and Jass noted that there\u2019s also a coupon cost that could be viewed negatively by rating agencies or regulators and affect leverage ratios<\/p>\n In terms of equity, Jass highlighted the stagnant M&A environment over the past five years or so, and the fact that IPOs have been few and far between, mainly due to valuations and demand for balance sheet businesses, firms may also wish to avoid potentially diluting their existing shareholders.<\/p>\n \u201cNow, the third lever is reinsurance, and everyone knows the regulatory and the rating agency capital benefit that prospective reinsurance has. But to the same extent, so does legacy. A structured legacy solution which qualifies for risk transfer, meaning cedents can benefit from rating agency capital, and they can benefit from regulatory capital. And by doing that and releasing the capital, they can go out and fuel additional GWP growth. They can go out, and they can pay dividends to shareholders, and you can really create that compounding effect over a period of time.<\/p>\n \u201cSo, we use legacy as a real capital arbitrage tool, and it’s best used when you’re dovetailing an approach from a prospective and a retrospective standpoint,\u201d said Jass.<\/p>\n For this approach and use of legacy to be sustainable, it requires a change in market perception, and while there\u2019s more work for stakeholders to do on this front and move legacy away from just discontinued lines or toxic liabilities, change is happening.<\/p>\n \u201cIf you look at the recent PwC report, they said that there\u2019s something like over a $1 trillion of liabilities worldwide. Now, cedents really have two options: You can keep them net, or you can utilise them as a capital recycling tool,\u201d said Jass.<\/p>\n \u201cNow, if you’re hedging against underperformance, and you’re structuring a bespoke legacy solution on a partnership basis, you’re allowed to free up that capital and continue to grow without being reliant on third-party capital providers, without being reliant on going and diluting shareholders or raising additional debt. So, I think when we look at it from the standpoint of, let’s not view legacy as you’re offsetting bad performance, let’s utilise it as an efficient form, as part of your overall capital stack, and embed it with prospective reinsurance,\u201d he added.<\/p>\n To do this, Jass told Reinsurance News that a quantitative and qualitative approach is required.<\/p>\n \u201cQuantitative meaning, and again, stripping it back, if you look at the legacy nature in practice, it is not price for incurred, it is priced to ultimate. They only get one opportunity. It’s not like a traditional renewal model where you go out every single year, you get to know the underwriter, you get to know the team, and you build a rapport with them. It is very transactionary in nature, which alludes to in recent years, where you’ve seen that bid-ask spread, which is improving now.<\/p>\n \u201cBut what we really want to do is have an approach where it’s more akin to the prospective renewal cycle. If we can structure a recurring option like legacy products, then every 24 to 36 months, the cedent has an option, but not an obligation, with a trusted legacy partner, we would like to exercise our right to transfer the exposure of these past years into your portfolio. And the legacy player will think, actually, the first deal we probably didn\u2019t price as well, but that’s fine, we’ll offset some of our exposure initial transaction to a future year. Or, actually, that deal didn’t quite work for us, would you be willing to retain more? And rather than a ground-up LPT, we’ll do an 80% LPT. And it will be far more akin to the prospective model. And again, it’s all about that capital efficiency point,\u201d explained Jass.<\/p>\n The qualitative side of this concerns building relationships, which is key in all corners of the risk transfer world.<\/p>\n \u201cRather than going out and having to bid, and rather than going out and having to say, your pick is here and our pick is here. Let’s build that relationship over the long term and have the legacy provider as part of that overall capital partnership, along with prospective reinsurers, debt providers, and shareholders,\u201d said Jass.<\/p>\n According to Jass, this type of legacy model can also help with deal execution as you’re generally forming a view of the cedent\u2019s reserving and then coming up with a technical price based on the volatility of the portfolio, and for legacy markets to meet their own return metrics.<\/p>\n \u201cNow, outside of that, a lot of the process is qualitative, and the reason it takes so long is the claims due diligence, the operational due diligence, the underwriting due diligence. If that was just done over a period of time, and a quarterly check in, or a biannual check in, or just understanding and building that relationship, you wouldn’t go through that arduous process of trying to get everything done whilst the cedent is trying to focus on business as usual. If you smooth the process out over time and develop more of that partnership aspect, I think you can alleviate some of the deals falling away,\u201d he said.<\/p>\n Augment Risk has always looked at legacy from the perspective of having it embedded as part of its value proposition. Jass underlined that if you\u2019re a structured prospective broker at the firm, going out to your client and your placing a structured whole account quota share, the great thing is being able to say to a reinsurer, after year three, four or five, should we embed an LPT as part of this process?<\/p>\n \u201cIf they’re releasing capital on the back years and they’re doubling their lines, they’re growing their participation on the forward years, it’s creating a holistic solution for the client. And that’s how we really set our stall out, how we could utilise both aspects of structured prospective and retrospective,\u201d he continued.<\/p>\n To end, we asked Jass about where he sees the legacy market going in the near term and over the next three to five years.<\/p>\n \u201cI think it’s always going to be embedded as part of the overall value chain. I think in the short term, it’s going to be a really interesting view depending on where risk-free rates and where inflation go,\u00a0considering the stagflationary pressures on the global economy. So, I think in the short term, there will be a view that the legacy market can still be used as a way to offset exposure for cedents where they may not be comfortable and really stepping into that role and becoming a true capital partner.<\/p>\n \u201cThe next three to five years, in my opinion, I think we’re going to see a real emergence of the ILS market in legacy, in both property and casualty ILS. I think there’s going to be more participation. Enstar seem to be the market maker in some of these solutions, and with the forward exit option, I think, that will become the norm. I think they would have become far more comfortable with greener risk, with more live underwriting, and you’re going to see things where you have trapped capital on property ILS transactions, where legacy can be used as a capital arbitrage tool to provide upfront liquidity to some of their cedents,\u201d said Jass.<\/p>\n Expanding on the emergence of casualty ILS and legacy, an area of potential growth, Jass explained that, on the back of every casualty ILS transaction, \u201cwe should be packaging up an exit option with the legacy market and growing that base,\u201d which \u201cwill allow that industry to grow and provide more risk capital to the industry, and it’ll provide a clean exit for the capital markets.\u201d<\/p>\n Another interesting area to watch would be the MGA market.<\/p>\n \u201cThe MGA market is continuing to grow. It’s at an all-time high. A lot of these MGAs reach a scale where setting up a balance sheet may be necessary. To do that, they may want to crystallise some of their PCs on back years. An interesting way to do that would be a legacy provider to come in and almost provide a risk transfer mechanism where they can realise some of that value today.<\/p>\n \u201cSo, I think the core component over the next three to five years is going to be flexibility of solutions, really embedding themselves as part of the overall insurance ecosystem and capital stack. And providing, rather than calling it legacy or run-off, it’s going to be structured retrospective solutions, or structured capital solutions. I think that’s where the market should go. And you’re going to have a few really key players in that industry, and I think they’re going to be the foundation of the market with some more esoteric players on the periphery,\u201d he concluded.<\/p>\n The post Dovetailing prospective & retrospective solutions the best use of legacy: Jass, Augment Risk<\/a> appeared first on ReinsuranceNe.ws<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":" In a recent interview with Reinsurance News, Jag Jass, Partner – Retrospective at reinsurance broker Augment Risk, explained that while there will always be a place for larger transactions targeting toxic liabilities and discontinued lines of business, legacy is best used when dovetailing an approach from a prospective and a retrospective standpoint. 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