Catastrophe bonds a competitive threat to reinsurance?

by Artemis on June 16, 2011

Higher reinsurance rates at the 1st July renewals likely won’t be enough to help reinsurance companies make up the losses they have suffered from disasters so far this year, according to FBR Capital Markets analyst Bijan Moazami in an investor update.

“We doubt that price hardening in the property catastrophe market will last long enough for reinsurers to recover the massive losses that they will have to pay for recent events” the note said. He also noted that any rate rises are likely to be mostly restricted to the P&C lines of business while casualty lines will largely remain unmoved.

The analysts note suggests that reinsurers will benefit from rate rises and also the potential for primary insurers needing to buy increased amounts of reinsurance cover due to the increased risk profile presented by the new RMS hurricane model.

However he hints that the benefits could be shortlived, saying that there are “pockets of opportunity”, as rates could stabilise fairly quickly unless the U.S. hurricane season causes significant further losses to reinsurers.

Interestingly, Moazami said that a factor that makes him cautious about the long term prospects for reinsurers is the “competitive threat” of alternative risk transfer and alternative sources of reinsurance cover. He specifically mentioned catastrophe bonds and industry loss warranties as risk transfer tools with the potential to take market share away from traditional reinsurance should market conditions be right.

It is possible that catastrophe bonds could become more competitive and offer a real alternative to reinsurance to primary reinsurers. Once the hurricane season has played out, the new hurricane model been fully absorbed and reinsurance pricing stabilised we should have a better picture of whether cat bonds or ILW’s could provide cost effective reinsurance cover for the higher layers of a reinsurance program.

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