Influence of capital markets capacity on reinsurance set to expand strongly

The reinsurance market entered the key January reinsurance renewals period with ample dedicated capital and stable pricing, according to reinsurance broker Guy Carpenter’s January 2013 Reinsurance Renewals report. Price volatility is being seen, but only on loss-affected lines and regions of business. One factor contributing to the healthy capitalisation of the global reinsurance market is the growing amount of capital market sourced reinsurance capacity which Guy Carpenter believes is set to expand its influence strongly.

Guy Carpenter’s own measure of reinsurance rate trajectory, the Guy Carpenter Global Property Catastrophe Reinsurance Rate on Line (ROL) Index, was down slightly at the January renewals. Demonstrating the continued tempering of rates by abundant reinsurance capital, this is the seventh consecutive annual renewal season in which the index has changed by only 10% or less. Guy Carpenter see this as a clear sign that the market has capacity appropriate to meet reinsurance demand and the niche but growing in import capital market capacity contributes to keeping rate rises more steady.

Global property catastrophe reinsurance Rate-On-Line Index 1990-2013 - Source: Guy Carpenter

As had been expected at the renewals, superstorm Sandy caused some fluctuation in rates in loss-affected lines and the U.S. northeast region. Of all lines and regions it was U.S. property catastrophe reinsurance which was most affected while other regions were flat to down. Other lines of business saw mixed fortunes, of the non-catastrophe lines marine and energy saw noticeable rate increases but many other lines saw rate reductions.

Regional property catastrophe reinsurance rate-on-line index - Source: Guy Carpenter

The drivers behind rate movements, or indeed lack of them, can be put down to factors including new reinsurance capacity helping to temper rates, reduced catastrophe losses which totalled just $50 billion for 2012 according to Guy Carpenter and the abundance of reinsurance capital.

Guy Carpenter said that fully dedicated reinsurance capital rose to record levels during the first three-quarter of 2012, exceeding $190 billion by the end of Q3. The impact of Sandy then shook things up but was not sufficiently damaging to the reinsurance market to cause broader rate increases at the renewals.

Aside from the macroeconomic environment the reinsurance market enters 2013 in a strong position, according to the report. However, it is more important than ever for reinsurers to focus on underwriting performance, capital management and adaptability in order to be profitable, as reserve releases continue to appear to be diminishing.

In the current reinsurance market environment Guy Carpenter foresees an increasingly influential role for capital markets capacity and the convergence market. Convergence of traditional reinsurance and capital markets capacity has now occurred, and the non-traditional reinsurance capacity now accounts for around 16% of total property catastrophe risk transfer limits purchased.

As evidence of the continued growth Guy Carpenter cite the healthy year that the catastrophe bond market had in 2012, with $5.45 billion of primary issuance according to their figures, details of all of these transactions (and a few more) can be found in our catastrophe bond Deal Directory.

Guy Carpenter’s report suggests that the influence of this capital markets sourced reinsurance and risk transfer capacity is set to expand strongly over the coming years. This additional capacity will be complementary in nature to traditional reinsurance capacity, providing carriers with extra flexibility to offload and diversify their portfolios of risk. This will allow capital market solutions to become established as a sustainable complement to traditional reinsurance.

You can access the full report from Guy Carpenter via the GCCapitalIdeas blog.