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Liz Green:

Welcome to everybody who’s joining us at the moment. You’re coming through thick and fast to ICMIF’s first of 2026’s events, specifically focusing on the all-important subject of accessing strategic capital for mutuals. We have a very illustrious panel with us today, but I’m so, so pleased that so many of you are joining us. I’m really delighted to be hosting this session. This is something that’s very, very close to my heart.

I speak to a lot of CEOs regularly and our members are saying that capital is no longer a technical side conversation for mutuals. It’s a central leadership question. Across our membership, our members are navigating a world that feels permanently unpredictable. That goes without saying. And in this context, questions around capital have gone well beyond what we would usually say are around the balance sheet questions. They are now about resilience, they’re about choice, and ultimately they’re about how we continue to invest, grow, serve our members without compromising who we are as mutual purpose-led organisations.

Traditionally, you know that mutuals have relied on the retained earnings and disciplined stewardship. That remains a single strength, a real strength of our model. But this environment we’re going to be operating in today is far more capital-intensive, far more complex, and far more demanding than anything any of us have ever inherited. What a delight. The conversation today isn’t about trying to get to the right answer. It’s about understanding the options available, the trade-offs that we have that are involved, and also how as leaders, we can think much more strategically and laterally about capital in a way that really aligns with our long-term purposes.

That’s enough from me. I’m just so pleased to be joined by three of ICMIF’s really, really important and valued supporting members. We have EY, Swiss Re, and Guy Carpenter on the panel, three perspectives that bring real depth, real practicality, and real-world experience to this conversation. And many of you work with these organisations and you’re familiar and you trust them, so it’s great to have some of their representatives on this panel.

We’re going to have speakers. We have two from EY Canada. We have Sam Nazari, who’s partner at EY. And then we have Daniel Willmann, an associate partner at EY Canada. And then we also have Germante Boncaldo, head of P&C in business development at Swiss Re. and Quentin Perrot, Managing Director, GC Securities Guy Carpenter Securities. Thank you, guys, all for being on with us. We are so pleased to have you. It’s all about equipping our members with insight, not the prescriptions, so let’s get over to some great questions. Let’s also start looking at a bit of context.

Can I hand you over now to the very, very safe and secure hands of Sam Nazari from EY? He’s going to set that context. Over to you, Sam, and thank you.

Sam Nazari:

Thank you, Liz. Good day, everyone. Thank you to ICMIF for bringing this group together. I’m so glad to see a broad mix from mutuals, cooperative insurance, all around the world together from different size, different geographies, different jurisdictions. But interestingly, all of us facing the very same strategy questions, and in this specific case being, getting access to the strategy capital.

To start with, Daniel and I, we are going to take a step back for all of us, trying to think about the why. What’s the growing need of the strategy capital for the mutual insurers and why is so important to discuss about it now? What are some of those drivers? Then from there on, we will be going forward and discussing with you the how of it. What have we observed in the market from your peers globally trying and trying to get access to the capital? What are different strategies that they are thinking about? And we are going to talk about a little bit of the implications of each of those. At the end of the session, once we are done, we are going to pass it to our friends at Swiss Re and Guy Carpenter, which going to continue on the very same topics, and we are looking forward to have a great conversation on the very soon.

Now, to start with, I’m talking about what’s the need for the capital, what’s the growing need of capital for mutuals and cooperative insurers. We always needed capital, but now more than ever. And there are three key forces in the market that are pushing big time the need for capital. Number one, the increasingly competitive market landscape, and I will expand on it in a minute. Number two is the regulatory pressure that I’m sure everyone is aware of it. In all the jurisdictions, there is a lot of that. And number three, general persistent global economic uncertainty and the affordability question.

Daniel will take on the regulatory aspect and the general economy, but I’ll quickly open up a little bit on the competitive market landscape. In every each of the jurisdictions, as we look at the market, the market is growing fast, but the scale and the capital is very much very important in order to be able to compete, provide better solutions, better systems, better underwriting, and ultimately grow the market share. And what we’ve been observing in majority of the markets is that the large public and private insurers with the flow of the capital that they have are outpacing the growth in most of the cases from the mutuals and the smaller side of the market. However, because mutuals and us, we want to compete for the values that we are there in the market for, we would need capital in order to make some of those adjustments, invest into the business, develop and deploy better efficiency and better execution excellence so that the competition can continue and that we can grow our market share within the same market.

I’m going to pass it to Daniel to talk about regulatory and economic uncertainty, and Daniel going to take us to the how and what we have observed. Daniel, I’ll pass it to you, my friend.

Daniel Willmann:

Thanks, Sam. The second driver of what we’re seeing is increasing the need for capital is around regulation. Globally, we see higher expectations around solvency and capital adequacy, liquidity and stress testing, and just generally overall governance, so risk management, operational resilience, third-party management. Even where we’re seeing capital ratios and expectations are stable, the cost of compliance is increasing due to the increasing complexity of the environments that we’re operating in. For many mutuals, this is resulting in holding additional capital on hand, not necessarily to grow, but just to remain compliant and resilient under these increasing supervisory expectations.

The third driver that we’ll touch on is the economic uncertainty and affordability. I’m sure we’ve all been to the grocery store recently. We know that inflation and cost-of-living increases are real. We’re also seeing now persistent economic uncertainty and geopolitical volatility, and this is really reshaping customer behaviour. In many markets, consumers are price sensitive. They’re less tolerant of premium volatility, and they’re more willing to switch providers, so insurance is more and more a commodity instead of a service that you’re willing to pay for. This is pushing premium pricing either down or just not allowing it to increase as fast as otherwise would be expected. To achieve this stable pricing or lower premiums, you need better underwriting, you need more efficient processes, and you need technology that helps you to enable certain cost reductions. Each of these things are capital intensive and requiring you to hold more capital.

If we think about all these forces together, you have increased competition, you have increased regulatory scrutiny, and you have this macroeconomic uncertainty. So, mutuals in general now are seeking to hold more capital to remain competitive, compliant, and relevant. And this brings us to the second part of our presentation, which is really how mutuals have responded to that in the past.

If we jump to the next slide, as a mutual, not every conventional capital raising tool is available. That being said, the assumption that mutuals lack options is also not correct. What we see globally is a diverse toolkit that’s shaped by regulation, your culture, as well as history. What we show on the screen here are different capital raising mechanisms that we’ve seen across the globe. All of these have been used within the last 10 years by the companies that you see on screen.

I’ll start with the first one. And Liz, you mentioned it, which is the one that’s most fundamental and most important to the mutual community, which is internal capital. This is represented by retained earnings, careful surplus management, and in some models and jurisdictions, it could be member contributions or member fees. Internal capital is often slow, but it is most aligned to the mutual purpose. In an environment like today where capital needs are accelerating, it might be too slow, so mutuals are looking for alternative ways to raise capital.

The second box there is debt-based capital instruments. This is represented by subordinated debt, unsecured bonds, or maybe some type of hybrid instrument. Across Europe, North America, Australasia, we’ve seen mutual successfully use these long-dated subordinated instruments to strengthen solvency ratios, support growth initiatives, and also fund transformation, and doing this without diluting control. So, debt is not without its risk, but it has become a mainstay of the mutual strategies.

The third one that I’m going to speak to is the mutual-specific capital instruments, and this is perhaps the most unique option for mutuals, and it’s developed within many jurisdictions across the globe. These instruments themselves are generally equity-like in behaviour, in the fact that they’re loss absorbing. They come with some discretionary returns, and they also ringfence member control. When they’re issued, they don’t necessarily give up voting rights or additional governance to those investors.

These mutual-specific capital instruments could be mutual certificates, they could be deferred member shares, cooperative shares, member bonds, or some type of capital contribution account. An important nuance is that even where mutual-specific instruments exist, they’re typically engineered around the regulatory regime designed to give you that capital recognition, and they often come with limits on how much capital they ultimately get you. So, this becomes more of a regulatory design exercise than it is an actual financing exercise.

But what these instruments have in common is that they’re intended to raise capital without demutualization. They’re there to preserve member control, and ultimately they want to align the return that investors get with mutual values. These are jurisdiction-specific, regulator-dependent, oftentimes they’re complex, but I think they’re a really good example of how mutuals can innovate when the traditional pathways to capital aren’t always there.

Sam, I’m going to pass it off to you just to cover the last two and then wrap us up.

Sam Nazari:

Absolutely. Number four that I would like to open up on is the entity structuring and restructuring. That’s again, another interesting lever that many mutuals are considering and have been working around that. That could include a mutual holding company, a reorganisation of different entities that exist that some of them could provide the potential from a debt and equity raising perspective. Some others can be a strategic measures between a couple of mutuals or a few mutuals together to be able to join forces, align on the mission and vision, and put the capitals together to get to the bigger picture that they want to achieve.

But also all of these, they are in the perspective of improving the capital efficiency and effectively making getting access to capital easier and more efficient as you move forward into the future structure. Normally, these ones are a little bit more expensive to deploy, but also they’re going to also take more time because there’s more considerations, different work streams that they need to come to the picture as you proceed with that type of access to capital.

Lastly, we have the alternative risk transfer and reinsurance-linked capital. Instruments like ILS, driving sidecars, cat bonds, and working with the reinsurers to get access to the capital markets and capital on that side is another very, very powerful tool to get access to strategic capital. Also, again, the reinsurance arrangements and rearrangements that many, many mutuals, they could work with their reinsurers on that in order to free up some of the regulatory capital and the solvency requirements that they have in hand is another thing that they can keep in mind as they move forward and try to think about getting access to capital.

One point that I would like to highlight before passing it to our friends in Swiss Re and Guy Carpenter, which going to in fact open up on this item very much more, is as we think about different methods and methodologies to get access to capital, we need to think about the question of, what’s the usage of the capital that we have that we are looking at chasing, how urgent we want it, and how much are we willing to sacrifice to get access to that specific capital in that timeframe that we are looking for? Calibrating against these criteria will help you navigate the path and figure out which one of the methodologies might be better and more efficient for the need that you are looking for. Always thinking about what’s the usage, how fast you want it, how much of capital even we want to free up, that would help us to identify which approach might be the best to take on.

With that, that’s the conclusion on the EY side. I’ll pass the ball to our friends in Swiss Re and Guy Carpenter, and I look forward to the conversation on the session.

Liz Green:

Thank you, Sam. That was excellent. What a fantastic way to frame the challenge and the opportunity.

Hand you right over now to Germante from Swiss Re. Take it away. Let’s look at it through the lens of reinsurance.

Germante Boncaldo:

Thanks, Liz. And thanks, Sam and Daniel. Most of all, thank you to all who are listening for allowing me to be part of this event and for your time spent on this. Of course, I’m going to present this from a reinsurer’s perspective, but I think that a little bit more broadly, a number of times a year, I have a conversation with clients around capital and putting capital to its highest and best use. And usually this is with companies that have gone beyond thinking about capital as just capital adequacy and more into capital efficiency, and am I deploying it in the best benefit for a mutual in terms of my members and the mission of the members?

We can go to the next slide. If we think about capital and its purpose, it’s really capital is there and it is an ability to absorb unexpected outcomes, which means consequently for a balance sheet insurance company, really capital is a capacity to write risk and to take on risk. Getting back to Liz’s introductory points around taking decisions on whether to pursue or which initiatives to pursue on behalf of members, we really look at any decision to take on a new initiative as having to decide whether or not to do it, but then how to fund it. And by funding it, I mean, to put capital against it.

This is a chart I use to discuss with the management teams around sourcing the capital against an initiative. It can either add capacity by raising new capital or retaining earnings or reducing the risk by doing risk mitigation or exiting the risk. Examples of adding capacity would be issuing equity, which obviously for mutual is a bit more difficult in all its additional steps, but as simple as raising fees to build retained earnings or cutting dividends, et cetera, reducing risk, reinsurance or hedging. And ultimately, reducing risk or taking the ultimate decision and reducing risk is to not take on that risk at all.

Within the spectrum, the impact to capital, obviously raising new or fresh capital for subordinated debt or third-party vehicles, et cetera, really increases available capital at one end of the spectrum. At the other end of the spectrum, not taking on the risk at all means decreasing the required capital. And because companies generally hold a multiple of required capital, any incremental reduction in required capital frees up a multiple of that in available capital. It’s an important thing to consider when trying to make capital decisions.

Also important to consider, who gets the risks or benefits of that capital. To the extent that either capital is raised with investors or raised through retained earnings on behalf of the members through surplus, the risk and the benefits really rest with the investors. If it’s done through retained earnings and it’s really done with the capital decision is made to fund an initiative with surplus, then really if that works out brilliantly, the benefits go to the members. If it doesn’t work out brilliantly and losses are taken, the losses are taken, absorbed by the members.

Conversely, at the other extreme, if one decides not to take on the initiative and leave that risk outside of the company and leave it with somebody else, and really it’s left with competitors to put it to an extreme. When I discuss with clients, I help frame this in terms of corporate finance. If we think about corporate finance, there’s two parts to it. One part is making decisions about where to invest, and then the second part is how to fund those investments. And really, that is quite analogous to using reinsurance. Which risks do we want to take on and how do we want to back those risks?

There’s obviously all sorts of different instruments. We’ll go to that next, on the next slide. Sam and Daniel went through this already, but I think it’s worth reinforcing, is that there’s a number of different options. You can accumulate retained earnings, which really means either… Often for mutual, it means raising rates rather than asking for a contribution, but essentially getting a contribution through raising rates, increasing margins, debt hybrids, and they mentioned before, specific regulatory instruments. For example, Canada OSFI has a Limited Recourse Capital Note.

Sidecars, alternative vehicles, which Guy Carpenter’s going to go into to greater degree in following what I talk about. And really, that’s another way to get third-party money into a mutual to help the members’ mission. Insurance-linked securities, reinsurance, of course, our favourite, but also there’s ways to pool risk through mutual group societies. And in fact, pooling risk together, we do reinsure some of those pools. We found that to be very effective amongst some mutuals or some mutuals have used that very effectively.

Also consider de-risking other initiatives. For example, one mutual we worked with, really the best thing for them to do is to free up capital to pursue an initiative by de-risking their investment portfolio. Getting out of some aggressive investments, we’re enabled then to free up enough capital to pursue the initiative without having to go to outside sources. And then finally, business line portfolio management, taking out peak risks or shifting your liability portfolio to the point where you can make sure that the capital is being, again, deployed to its highest and best use. I’ve left out, deliberately, changes in structure, forming mutual holding companies or demutualization, but those have also been incredibly effective tools. I think about Definity in Canada who de-mutualized because they wanted acquisition currency, but that’s a very different step. They’re very, very dramatic steps, so that’s why I left that out.

Two things which I think are critical to all this when you’re assessing all these different options is, one, recognise that receiving funding is very different than receiving payment. Getting money from somebody that you have to give back is very different than receiving a payment for somebody that’s going to cover a loss that you’ve incurred. That’s one thing. The second thing is, different instruments have different purposes and behaviours, and I think it’s super critical to understand the initiative that you want to pursue and why you’re raising the capital. And that can often define what’s the best form of capital to raise against that initiative or as part of the portfolio of capital that you have.

To that point, I’ll move to the next slide. This is a conversation I have with clients often because they often ask us… These are just three extremes, common equity or more retained earnings versus subordinated debt versus reinsurance. They often ask us, “Tell me the price of each and which is cheapest.” For me, that’s really the wrong question. Usually they end up being about comparable. Obviously, there’s differences in different situations, but generally they end up being comparable. More significant is what they do. For example, increasing policyholder surplus is great because it’s the most flexible. That can be deployed against any risk or against any unexpected outcome. However, it’s also the costliest, and basically you’re keeping their members’ funds on a contingency basis or a contingent need.

The middle of the road is subordinated debt, raising funds and then using that to support an initiative. It’s great because then you’re not relying on member funds to support the growth or the initiative, but rather somebody else’s funds. However, if a loss does occur, you have to pay the loss and pay the bondholders back as well. Reinsurance is great in the sense that if a loss does occur, the reinsurer pays the loss and your members are the beneficiary of that. The downside to reinsurance, of course, is that it’s not free, and more significantly is, it only covers the specific losses on that reinsurance contract.

But I think the important message out of this is those two messages which I said earlier. One is, funding is different than payment, and two, understand the initiative or the risk that you want to cover and your capital portfolio and the different instruments and understand the roles of those different instruments and how they behave and how they perform when making a decision on what mix of instruments to use. And with that, I’ll turn it to Guy Carp, Quentin.

Liz Green:

Thanks, Germante. That was really, really helpful. And over to you now, Quentin, from Guy Carp. You’re now going to talk to us through the lens of the sidecars and the insurance-linked securities options.

Quentin Perrot:

Thank you very much. We thought the sidecar topic would be interesting to the audience because it achieved obviously many of the objectives that have been discussed by Swiss Re and EY, but in addition to that, it’s a market that is moving quite quickly at present, led by new structures and new investors.

Can we move to the next slide, please? Basically, it’s a topic that is really evolving fast and we are seeing new application to sidecar than was possible before to a wider range of institution, including in particular mutual companies. Essentially, a sidecar is a quota share, so it’s akin to reinsurance. It’s transferring a share of the premium and the share of the claims, but it’s doing it through… The risk is ceded to an investor and not a reinsurance company, so we need some form of transformation mechanism that allows the investor who doesn’t have a reinsurance licence to acquire the risk, and that’s why it’s called a sidecar.

There are multiple ways of setting up a sidecar, but essentially they are part of three families. Either we set up an SPV, so Special Purpose Insurer, typically domiciled in Bermuda. We can now use London Bridge, which is the platform from the Lloyd’s of London or we can also… But it’s a lot more complex and probably not applicable to most of the audience here… set up a dedicated, rated platform for the purpose of the sidecar.

The sidecar are becoming fashionable again because of the increase in interest rates in the past few years that essentially allow the investors to get leverage from the premiums that are ceded to the sidecar, and they invest this into an asset strategy that generates a return that is additive to the underwriting return of the portfolios that is being ceded.

Put it simply, the investors get the sum of two cash flows. On the one hand, they earn the difference between the premium and the claim, which should be on its own profitable unless it’s a bad year. But in addition to that, they also earn the investment yield from having invested the premium before the claims are being paid. In the current market environment, this is quite attractive, and therefore we are seeing many new investor eager to participate.

Sidecar used to be used predominantly for property cat risk. They have been in place for 20, 30 years by now, but the recent sidecar that we are seeing tend to be more multi-line or casualty, either way, transferring more risk that was available in the past. And if you think about a multi-line cycle, they are very capital-efficient because they transfer more risk. Therefore, from a Solvency II perspective or for most of the capital regime that are regulating mutual companies, that diversification will mean improved capital belief.

Can we move to the next slide, please? There are multiple benefits of using sidecars. Not all of them are applicable to mutual companies, but essentially we can sort them into four categories. First of all, the quota share and the sidecars will convert underwriting income, which is volatile and risky, since it depends on the claim performance. With the sidecar, that volatility is transferred into a more fixed income that allows to stabilise the P&L. Whilst it’s useful for mutual companies, I don’t think that is as important as it necessarily is the case for a commercial insurance company who has to pay a dividend to their shareholders, and therefore must insure regular P&L cash flows.

The second thing is that it creates a positive equity story with the shareholders, because the shareholders like the fact that the cycle has been done. Again, probably not the most efficient use for a mutual company. The third one is probably where it’s more valuable to you, is that the sidecar, by removing the risk of the balance sheet, as my colleague from Swiss Re said, will reduce the capital charge of the company. And therefore, that capital that has been freed up can be used for other activities like new business activity that the mutual might want to enter into. The sidecar is relatively efficient at doing so.

The last point, which is more a tactical point, which could be of interest to mutual companies, but is not necessarily the focus of today’s presentation, which is about capital management, is about optimising the cost of reinsurance. There are multiple ways of doing sidecars, and I’ll go through that in a minute, but one of them will be very efficient at doing this. I’ve listed the name of four students that have done sidecars recently in the list below. All of them are different. They all achieve different goals, and maybe we can go through them very quickly.

Allianz has done at the end of last year, a sidecar through Lloyd’s of London, with a large investor called Oaktree. Basically, they cede a portion of their reinsurance programme to Oaktree. So it’s not a capital instrument, but it’s a sidecar. You may hear about this. Note that this sidecar is not about capital, it’s about optimising the cost of reinsurance. Hannover Re has had for years. It’s actually probably the long lasting sidecar. It’s called the K programme, transfer property and specialty risk. This one is 100% for capital management. As you may know, Hannover Re is owned by Talanx and they have limited ability to raise additional capital, so they have to be extremely… They have to optimise how they allocate their capital. The sidecar has been a permanent vehicle for them to achieve that objective.

QBE has recently done a sidecar that covers their casualty lines of business. Again, this might be of interest to you because the motivation of the vehicle was to optimise the balance of the capital between property and casualty within the QBE rebalance sheet. By doing the sidecar, it allows to maintain 50/50 allocation between property and casualty whilst allowing QBE to write more casualty business because they see attractive opportunities in the casualty business. But without the sidecar, they wouldn’t be able to cede them because they would then have too much weight on casualty.

The last one is AIG, which it’s a bit akin to Allianz. They did a deal through London Bridge, so the Lloyd’s platform. But it’s also a mean to generate an aggressive override through relatively risky investment strategy. The premium that is sourced by AIG is invested into a basket of private credit assets, and then there’s a profit commission that goes back to AIG. And therefore, it’s not so much a capital instrument, but more so then a profit making instrument. Can we go to the next slide, please?

I will go real quick in the interest of time. There are two types of sidecar that are available. They are the direct cession that are true quota share, so you take the premium from the book and the claim from the book, you cede that. These are the ones that are capital efficient because they are the ones that effectively transfer the risk away from the balance sheet of the cedant. These are the ones that are probably more valuable as capital instruments for you.

However, we are seeing new types of sidecar being sponsored in the past two years, and most of them are ceded re sidecar. These are sidecar that are specifically designed for primary insurance or mutual companies who want to optimise the cost of reinsurance. Essentially, how it works is you take a share, for instance 10%, of all the outward treaties that you have, and you cede that in one go to the investor. It gives two benefits. First of all, instead of having to find, say, 100% of your placement with reinsurance companies, you only need to place 90%, for instance, if you place 10% with the sidecar. That allows you to increase the competitive pressure within your reinsurer.

The second thing it does is that the investor will pay an overrider. So, instead of paying the same margin to the reinsurer, you pay that margin minus the overrider that the investor pay you back. So, it’s a way to reduce your cost of reinsurance. It’s not a capital [inaudible 00:35:04], but it’s becoming more and more popular. We wanted to explain to you so that you can make the difference between the two type of sidecar.

Can we go on to the next slide, please? Basically, how to identify whether the sidecar works for you. There is this multiple-step process to follow with yes and no questions. But essentially, first of all, you need to identify whether the sidecar achieve your strategic objective. For instance, if you want capital, is the sidecar the right instrument for you when there are alternatives available? And then what we do is we create a cashflow model of the different cash flows of the sidecar. When is the premium paid? When is the claims paid? When does investor get its money back? And then we validate whether the portfolio and the structure we have in mind can work to generate enough margin for the investor. And then if it works, then it’s worth looking into the sidecar more thoroughly.

One important point to note is that the sidecar creates residual risk to the cedant because it’s not fully funded. It’s only funded up until the capital that the investor has put in, so the tail risk remain within the cedant. The other risk that the cedant will retain is the investment risk of the collateral. The investor will put some collateral, the premiums are being deposited into the vehicle as well, and that pot of money is then invested into a portfolio of assets. You, the cedant, have to define with the investor in what those assets can be invested in. If the investment strategy is risky, you would retain the risk that there is investment losses, and those investment losses would prevent the vehicle from paying claims if they arise. You need to understand all those risks as you go through the assessment of the structure.

Can we go to the next slide, please? To conclude the introduction… And I’m sorry that you can’t see the titles for the two left column, the Bain Capital, Blackstone and Brookfield is private equity firm, and then Sixth Street, Diameter, D.E. Shaw and Finepoint are the alternative investment manager. Those four families of investor are investors that typically do not participate in cat bonds or property sidecars or those old fashioned ILS. In the past few years, they have expressed a strong interest in participating in sidecars because of the ability to invest the proceeds of the premium payable.

You can see that all of them have a credit background, so they come from the credit world, and so they are attracted by… They will want the sidecar to have relatively limited volatility in the underwriting performance. That’s why they prefer sidecars that are exposed to multi-lines or to casualty as opposed to pure property risk. Pure property risk would have too much volatility, and therefore it would restrict the ability of those investors to invest the proceed into some working investment strategy. So, when we think about the sidecar, there can definitely be some form of nat cat exposure in there, but it cannot be the majority of it. The wider the portfolio, the more the sorts of investors will be able to assume the risk and pay an override and a commission that is attractive to you.

With that, I think we wanted to allocate 20 minutes to questions, so I will pause now, but happy to answer any questions you may have.

Liz Green:

Thank you so much, Quentin, for demystifying the sidecars for us. You’re absolutely right, time is against us, but we really do want an opportunity for our wonderful panellists to have the chance to discuss, if you take yourselves off mute. I have a number of questions, as you’d imagine, from our members. They want to interrogate this further.

I’m going to start with the first question that’s come up, which is around governance. It’s about the quirks of being a mutual. What governance or member approval hurdles are typically slowing down execution and how have successful mutuals overcome those? Who would like to jump in there?

Germante Boncaldo:

Since no one else is taking it, I’ll take it. Generally, for standard actions or more common actions, say the less intrusive ones, i.e., building policy holder surplus through increased margins, basically raising rates, or issuing regulator-endorsed subordinated notes or subordinated capital, those generally tend to have the least impact or least amount of governance from members.

At the other end of the spectrum, obviously demutualization would be just huge, and that’s the biggest. In between, or where I’ve seen a lot of mutuals, not so much struggle with their members, but have to have conversations with members or approach members, is around mergers. Because of the issues that Daniel spoke about before about increased regulatory scrutiny, also increased investment needs in terms of AI and digitization, et cetera, some mutuals that are subscale are exploring or joining with other mutuals, and that can be a very difficult journey with members and create a lot of hurdles.

One of the ways to get through that is through almost avoiding the merger through forming a federation, which is another structure that can be used to facilitate that. But I don’t think that the social or emotional issues around a merger in terms of linked to community, the importance of the board and the members board’s relationship with the community and with the members should be overlooked when considering combinations of mutuals.

Liz Green:

Thank you so much, Germante. That was really well explained. And I can identify that from what I’ve heard from our CEOs.

Moving on to some other questions… And guys, please do jump in for further questions. I have a few here, but if you want to jump in, those who are on the audience, then do let me know.

Germante Boncaldo:

If I may, Quentin-

Liz Green:

[inaudible 00:42:22].

Germante Boncaldo:

… loved your explanation of sidecars and appreciate it very much. What are some of the downsides or challenges of having a sidecar? Why would somebody not want to do one?

Quentin Perrot:

First of all, setting up a sidecar is a lot of work. It’s complex, it’s tedious. The investors are not reinsurers. They are largely unfamiliar with some of the nuances of the book that is being written. So, we have to spend a lot of time upfront, making sure that they understand what they’re stepping into. Also, we need to create bespoke reporting. We need regulatory approval for the vehicle. We need legal documentation drafted specifically for this. So, there is some form of initial investment in time and resources that is not negligible.

The second thing is, in practise, the sidecar is aiming at being a permanent substitute to reinsurance and completely offload the risk, but there are residual risks that remains in the sidecar. These are, first of all, the tail risk as in once the capital provided by the investor is depleted and the premium have been burned by claims, anything in excess of that is retained by the cedant. The second thing is the investment risk and the investment portfolio. The third risk is the commutation risk because most investors can only have the investment tied up for so many years. We typically see that around seven years. Some can do more, some can do less.

There are ways to mitigate all those risks. For instance, if you go through Lloyd’s of London, you can have the paid risk be assumed by Lloyd’s themselves by the Central Fund. For the commutation, you can work with run of players to avoid those risks. But every time you do that, it, (A.), increase the complexity and, (B.), eats through the economics, so there is no free lunch basically.

At the end of the day, the sidecar… It’s not straightforward, basically. It can work, but it will require a lot of upfront work, and then also ongoing investment in time to make sure the investor remains motivated throughout the sidecar. But if you can find the solutions, you can see people like QBE or Allianz, they are very, very pleased with the sidecar, so if you can find a way to make it work. And I would argue also Swiss Re has a very successful sidecar.

Germante Boncaldo:

More than one, thanks.

Liz Green:

That’s really helpful, Quentin. We have a hand up in the audience from Maja. Would you like to take the floor, Maja?

Maja Dos Santos:

Hi, Liz. Thanks. It’s Maja DeSantos from Wawanesa-

Liz Green:

Sorry, Maja.

Maja Dos Santos:

… here in Canada. I’m glad there was follow-up question on sidecars, because I was listening on it intently. I think, Quentin, you answered some of my questions, like, how could this be used in Canada when, for example, with cat excess of loss, which is BC quake driven and… Not only the companies want the protection, but our regulator has very strict expectations about protection to 1-in-500-year event.

[Inaudible 00:45:54] a sidecar would love to find a way to reduce this reinsurance cost, but I don’t know that it would satisfy regulatory requirements, but also our appetite of how much we would retain. Have you seen in the practise in Canada and in which structures is really in the question?

Quentin Perrot:

We have been able to do cat bonds for Canada in the past 15 or 16 months. That was a welcome development where regulatory credit could be achieved. It’s possible that the Canadian regulator would agree to a sidecar on a collateralized basis. In any event, you can always do the sidecar through Lloyd’s, because Lloyd’s is an eligible or accredited market in Canada. If you do it through Lloyd’s, you are facing directly a rated syndicate.

The Lloyd’s rating is AA- and that’s how you will compute it from a regulatory standpoint. That would alleviate all regulatory issues because it’s as if you are transacted with the normal reinsurance companies. And then, the 1-in-500 requirement, again, if you do it through Lloyd’s, that won’t be an issue because Lloyd’s will protect you up until the event cat that you would have in a normal quota share.

Otherwise, on a collateralized basis, you can collateralize up to 1 in 500, and that should work. We see most of the sidecar be collateralised up to 1 in 250, but the difference between 1 in 250 and 1 in 500 is likely to be relatively modest when you look at the AP curve in terms of degradation or the excess capital you need to fund. So, it may be economically efficient.

But if you really want to collateralize very, very fine detail, going through Lloyd’s might be the better route, albeit Lloyd’s will not be very efficient when it comes to a portfolio that has a meaningful exposure to, say, Canada earthquake, for instance. So, you’d have to have a very diversified [inaudible 00:48:07] of business to offset the strong Canadian earthquake exposure.

Maja Dos Santos:

Thank you.

Liz Green:

Maja, did that answer your question?

Maja Dos Santos:

That was great. There’s a lot more follow-ups, but I think that’s a more deeper conversation. Thank you.

Germante Boncaldo:

Just-

Liz Green:

Thanks, Maya.

Germante Boncaldo:

Sorry, just to develop a little bit on that, Maja, too. If your concern is cost of reinsurance around BC quake, the other alternative I would consider that, yes, there’s been some ILS done, but really in a very unique circumstance, I would consider ILS, because BC quake is a very attractive risk to the ILS and investor market. Happy to work with you on that.

Maja Dos Santos:

Thank you, [inaudible 00:48:58].

Liz Green:

Wonderful. So, a few options there for you. Thank you, panellists. Again, gosh, time keeps going too quickly. I can squeeze in just one more perhaps. It’s a bit more of a general one and one for any of you that wants to jump in.

If you could give one piece of advice to a mutual starting their journey at the moment, what would it be? What would be the big takeaway that you’d like them to consider? Anybody from the panel.

Daniel Willmann:

I think-

Liz Green:

Daniel, yeah?

Daniel Willmann:

… maybe one thing I’d say is, as we were preparing for today and doing a history of what’s happened in the mutual space globally… I mentioned it earlier in my presentation. But I think what was interesting is, there are various mechanisms that you can pull both from capital generation and… Germante mentioned it, which is also just risk reduction. I think there’s a lot of paths to go down. Sam talked about it in terms of thinking about it less as the question of, how do I raise more capital, and more as, what is the problem that I’m trying to solve? I think what we’ve talked about today is, there are lots of mechanisms to solve specific problems depending on what you’re trying to solve for.

Sam, I saw you come off mute. I don’t know if you want to jump in.

Sam Nazari:

Yeah, I wanted to actually continue on the same. Fully aligned on your answer. If I have one advice for everyone is, I think answering the strategy question of ambition and growth and what it is that you would like to achieve and do, and to what level would you like to set your ambition? That would influence the implications, the mechanisms from the capital raising and the type of capital that you’re looking for. And as you do systematic thinking like that, you can start thinking about organising your governance, developing different forums of governance that they could have authorities for approvals for some of these mechanisms that might be easier to raise capital without needing to go to all the members. And for some other ones that are more complicated, let’s say restructuring, keep everyone in the loop and take your time to get there.

But effectively, all of that should be anchored against what’s the ambition of the organisation and how that can go around the capital raising question.

Liz Green:

Perfect. Perfect. Any last thoughts from anybody else? That was a good mic drop, that one. Thank you so much, Sam.

Okay, folks. I think as we’re running out of time, I’m just going to take a pause and reflect and just want to think about one thought here. The world is under pressure. We are all under pressure as professionals in the life insurance, mutual insurance and P&C insurance world. We have capital decisions that are testing leadership at the moment. At ICMIF, we feel that we are trusted to deliver, and that means choosing capital strategies that strengthen resilience, serve members, and stand the test of time.

I think what our wonderful panellists and our wonderful supporting members have demonstrated today is there is options out there, there is support, and there is exceptional leadership within and at the side of our industry. I really want to thank everybody who’s joined today. I want to thank our fantastic panellists and our supporting members. And I just want to also pause to take one moment to tell you that we do have even more webinars to look forward to this summer. We have two more that are coming. One is the emerging themes across life insurance, which is going to be happening on the 9th of June. And then later on in July, we are looking at strengthening wildfire resilience perspectives from Canadian ICMIF members, so two excellent webinars as well.

But let’s just pause to thank everybody who’s participated, who made this really important webinar today. So important. Thank you so much. We will look forward to seeing you all again. Have a wonderful, wonderful day, whether you’re starting in your morning or you’re going into your evening. ICMIF is always here to support you and so are our supporting members.

Thank you, everybody, and take care. Bye-bye.