Alternative capital and innovation in risk finance

May 2019

Insurance industry participants are exploring new methods of risk transfer. These methods have grown and developed in significant ways during the last two decades; they have the potential to provide financing for new classes of perils and to expand the overall scope of the insurance market by tapping the broader capital markets. Proponents argue that innovative risk finance can help match risk to capital more efficiently than traditional insurance/reinsurance contracts, and that these techniques could upend traditional insurance business models. Other leaders acknowledge that alternative capital has added capacity and flexibility, especially to the reinsurance and retrocession markets, but suggest that its impact is slight relative to the overall scope of the insurance sector. Improvements in modeling, pricing, transparency, and liquidity will be required for insurance-linked investments to have a significant impact on the overall insurance sector.

On March 5 in London and March 21 in New York, 2019, insurance industry leaders met to discuss alternative means of transferring and financing risk. In separate sessions, participants also discussed oversight of third-party risk and developments in China. This ViewPoints synthesizes these conversations, as well as discussions with participants held in advance of the meetings.