Alternative capital could take 50% or more of global prop cat market

Alternative reinsurance capital and insurance-linked securities (ILS) could command 50% or even more of global property catastrophe reinsurance market limit as the ILS investor base continues to grow, Brett Houghton of Fermat Capital said at a recent event.

Alternative capacity is set to continue growing, both as the ILS investor base continues to broaden and shows increasing interest in the space, Houghton a Managing Principal at specialist catastrophe bond and ILS asset manager Fermat Capital Management LLC commented during a panel discussion at investment bank Macquarie’s 2014 Bermuda in Boston event last week.

Currently Houghton cited alternative capital as somewhere between 15% to 20% of global property catastrophe reinsurance limit, but said this could increase to 50% or more as the sector matures.

Houghton also said that the amount of limit available for alternative and traditional reinsurance capital to compete over was also likely to keep growing, with more government and state-backed insurance entities coming to market to tap the capital markets and ILS.

On the topic of growth for alternative capital the panelists said that the same rationale that led to the securitization of catastrophe risk, a rising pool of risk in need of capital to match it, has not yet occurred in the casualty space, suggesting that there is sufficient capital to take on the risk. Challenges in modelling the risks in other lines of business as well as whether there is actually sufficient investor appetite to move wholesale into lines of business like casualty were also raised at the event.

The locking up of investor capital in longer-tailed lines of business, while it waits for claims to be estimated, accounted for and paid, such as casualty was also discussed and panelists discussed investor concerns and how this also holds back alternative capital’s growth into new reinsurance lines.

Another debate at the Macquarie event discussed the reinsurance relationship and how much it really mattered. Panelists discussed whether the value and efficiencies in the capital markets could compensate for changing relationships, something that we’re already seeing evidence of as so many new sponsors come to the catastrophe bond market in recent months.

As insurers begin to fully appreciate the benefits of efficient capital and the ILS structure, as well as learn how best to leverage the use of instruments such as cat bonds, we may find the much vaunted relationship begins to matter less and this also helps to stimulate further alternative capital and ILS market growth.