Alternative capacity to hit 15% of global property catastrophe reinsurance in 2013

The growth of convergence reinsurance capacity, largely third-party investor backed, has seen strong growth over recent years. According to reinsurance broker Guy Carpenter, alternative reinsurance capacity has grown from just 8% of the global property catastrophe reinsurance market at the end of 2008 and looks set to reach 15% by the end of this year.

Looking at the percentage of the overall market that consists of alternative or third-party reinsurance capital is a useful way to look at how the market has grown over time. The strong growth that has been seen in this metric is even more impressive when you consider that the overall amount of global property catastrophe reinsurance capacity available has also been increasing.

Guy Carpenter recently estimated the size of the alternative and third-party capital backed reinsurance sector at $45 billion, which it believes is 14% of the global property catastrophe reinsurance market. It expects this to grow over the rest of this year and believes that alternative reinsurance capacity should account for 15% of the global market by year-end 2013.

We asked David Flandro, Global Head of Business Intelligence at Guy Carpenter, for his thoughts on one of the hot topics related to third-party capital in reinsurance; will it continue to grow or will it prove opportunistic and exit the market at the first sign of major losses.

David responded; “There are two schools of thought on the future growth of what we term convergence capital. The first is that in the event of a large catastrophe or dramatic improvement in other investment returns, the capital will ‘cut and run’. The counter theory is that the capital is here to stay and will, in fact, ‘double down’ post event. We don’t know the precise answer but think it wise to assume the capital is here to stay and will continue to grow. Our projections reflect this.”

The growth of this segment of the global reinsurance market has been impressive, especially considering that it is increasing its percentage contribution to the market at a time when overall reinsurance capacity has also been growing strongly. It appears that growth of alternative reinsurance capacity has outstripped the growth of traditional reinsurance capacity.

David continued; “When viewed over 10 years, the growth of convergence capital has been remarkable. Where a decade ago, it was a mid single-digits percentile of total cat capacity and was considered marginal, it is now expected to reach 15% in 2013 and is playing a very important role in key renewals.”

The chart below shows Guy Carpenter’s analysis of the contribution of the alternative reinsurance capacity to the global market over the last six years.

Alternative reinsurance capacity as a percentage of global property catastrophe reinsurance limit - Source: Guy Carpenter

Read our article from April on the growth of alternative reinsurance capital here and an interview with David Flandro which was also published in April and discusses the same topic.

Read our discussion of Guy Carpenters recent June reinsurance renewals report: Reinsurance convergence capital puts pressure on renewal pricing at June 1.