As traditional reinsurance capacity continues to tighten and prices rise, alternative solutions are stepping into the spotlight, with collateralized reinsurance particularly emerging as a key tool for insurers seeking flexibility and balance sheet efficiency, according to Anthony and Peter McKelvy, co-founders of Northern Re.New York City and Cayman Islands based Northern Re looking to deploy third-party capital it raised from investors against a select group of historically profitable insurance portfolios focused on high-frequency, low-severity insurance risks.During a recent interview with Artemis, the McKelvy brothers shared what Northern Re’s take is on future market trends within the collateralized reinsurance market.“As traditional reinsurance capacity becomes scarce and costly, Northern Re’s specialized capabilities address a growing market need.

I’ve [Anthony] personally seen and been a contributor to the proliferation of casualty ILS and collateralized reinsurance throughout my career so it’s incredibly rewarding to see how big of a role this type of capacity plays in the U.S.market.Beyond the U.S., we see adoption in U.K.

and E.U.where we’ve spent considerable time over the last year educating cedents on the benefits,” the brothers explained.“Similar to how the U.S.

saw MGAs and program carriers grow exponentially in the 2010s with collateralized reinsurance supporting that business, U.K.and E.U.are following a similar trend.

This is a big focus area for us as we grow our footprint.” Adding: “Northern Re’s client base now includes dozens of cedents across global markets, with a retention rate of 94% reflecting the value of its long-term partnership approach.“It is very clear now that collateralized capacity is a beneficial alternative for cedents with certain buying as recent industry data from Aon shows $115B of alternative capacity deployed during 2024, up 24% from YE2022, fueled by demand for balance sheet solutions beyond what the traditional market is able to offer.“We expect this adoption to continue globally and look forward to supporting our partners through innovation and collaboration.” The discussion then turned towards which the firm set up for cedents seeking capital relief, earnings stability, and multi-year continuity, beyond traditional quota share.

Whilst speaking with Artemis, the brothers explained that Northern Re’s structured solutions move beyond the traditional one-size-fits-all approach to reinsurance.As per the brothers, each transaction is designed around the cedent’s specific balance sheet objectives, whether that be GAAP earnings acceleration, statutory capital optimisation, or volatility smoothing across business cycles.“We’ve learned from the team’s experience and continuously evaluate a specific set of market dynamics to create a better outcome for each of our clients.

We’re intimately familiar with how capital markets have interacted on a collateralized basis in the past and we’re aware of the sensitivities and pitfalls which have presented themselves in those approaches.“One of the core issue we identified how institutional firms are  investing – through a transformer, with very little other re/insurance or operational infrastructure surrounding the transactions.Northern’s approach is different – we are a reinsurance company through and through, supported by private capital,” the McKelvy brothers told Artemis.

“For our investors that means we have an unbiased view of risks as we source, underwrite, price and structure them.We align ourselves with them through the Northern platform so that we win when they win.This means staying as involved in the transaction in Month 60 as we were in Month 1, as ongoing capital modeling, data infrastructure, and reporting are as critical to the success of ILS as the initial analysis.

The ongoing support, and expertise to deliver it, is what has been missing from casualty ILS.” Additionally, the brothers also noted that for the firm’s insurance company partners, this means that they deal with Northern – the interactions, contract terms, and other key tenants of a successful reinsurance transaction remain in-line from what those partners might expect from a balance sheet reinsurance company.“Because of this, our platform is highly attractive and easy to do business with – we’ve proven this across dozens of cedents throughout the U.S., Bermuda, U.K.and now E.U.,” the brothers added.

Moving on, the brothers then discussed whether they believe that traditional quota share products are sufficient for cedants seeking to manage increasingly complex risks in today’s volatile insurance market “The short answer is no – insurers are increasingly seeking reinsurance solutions beyond traditional quota share arrangements to manage risk and optimize capital.This includes exploring alternative capacity and tailored options such as structured quota shares, parametrics, multi-year XOL covers, whole-account transactions, and other kinds of highly-engineered reinsurance products.“This is particularly true for insurers looking to manage large or more complex books of business, and to address specific capital or regulatory requirements.

For cedents to perform their core function of assessing risk and providing policyholders with attractive products, it is important that reinsurers provide modern, creative, and structured solutions to help cedents to effectively manage their capital.” “However, traditional reinsurance often forces cedents to choose between capital relief and operational complexity.Further, cedents end up bearing too much cost for too little flexibility,” the brothers added.As per Anthony and Peter, Northern Re has positioned itself to meet these demands in a more creative and cost-effective manner.

“By providing a premier platform through which capital markets can support the insurance market, Northern Re is able to provide a much more custom offering.While other reinsurance platforms have attempted to do this in the past, none have established the required sophistication across pricing, structuring, capital modeling, and operations.Performing these functions consistently and at a very high caliber are critical to the success of a reinsurance company and subsequently the ILS asset class.” Importantly, the brothers also explained to Artemis how the company’s whole account quota share capabilities address the growing complexity of managing reinsurance across multiple lines, jurisdictions, and regulatory regimes.

“Through a centralized underwriting platform, we provide unified solutions that reduce administrative burden while delivering competitive economics.Our underwriting is housed in a single location with a global mandate, ensuring cedents benefit from a consistent point of contact and decision-making authority.This structure gives us the flexibility and speed required to craft tailor-made coverage for complex needs, while reducing the back-and-forth that often delays traditional placements,” the McKelvy brothers said.

To end, Anthony and Peter McKelvy provided Artemis with some details surrounding what’s next for the company.According to the brothers, Northern Re expects to expand its capital base in 2026 to continue supporting larger transactions and grow in-force premium as structured solution opportunities continue to emerge.“A big contributor to this will be business outside of the U.S., as we’ve already executed on a number of transactions with Bermudian and U.K./E.U.

cedents,” the brothers said.“That market is growing significantly, with Howden Re reporting Europe’s 5-year CAGR for MGA GWP since 2019 at 23%, outpacing the rest of the world which sits at 15%.Our presence in those markets has been well received, as cedents gain greater appreciation for how ILS structures interact with Solvency II alongside the benefits of collateralized reinsurance.

“In essence, we’re bringing our playbook to Europe, but with true insurance company DNA — not just a fund or transformer model.We understand both GAAP and Solvency II optimization, putting us in a unique league of reinsurers,” the brothers continued.Adding: “Alongside this we are hiring exceptionally talented individuals across multiple verticals and at the same time investing heavily into our technology infrastructure The proliferation of generative AI platforms and tooling has eliminated the need for vast teams of accountants and other back-office functions.

Given where we are in our lifecycle and the experience of our founding team, we expect to be one of the first reinsurance companies that is able to fully harness this technology and create connectivity throughout our business.To conclude, the brothers highlighted how Northern Re is entirely employee-owned, which enables it to maintain a long-term vision about growth and market cycles.“This perspective is required but sometimes overlooked in the reinsurance industry, as relationships and results are paramount to success.

Instead of a quick exit strategy, we’re focused on evaluating the market and needs of our LPs to drive smarter decision making over the next several decades.” ..All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance can be accessed online.Our can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.