Much of the new reinsurance capital will be permanent: Blackrock

Much of the new, or alternative, capital, which has flowed into the reinsurance market in recent years, will prove permanent in the face of major catastrophe losses, according to the world’s largest asset management firm Blackrock.

In its latest global insurance outlook report, multinational asset manager Blackrock highlights alternative reinsurance capital as a key theme likely to impact the insurance and reinsurance market in 2014. Blackrock has clearly been keeping abreast of what it calls the influx of capital into insurance-linked securities, sidecars and catastrophe bonds, as the appeal of these assets grows and believes this demand will continue.

Blackrock said it expects investor demand will remain high for these relatively uncorrelated and high-returning assets, adding that this signals that supply will continue to increase to meet the demand from new capital to access the returns of catastrophe risk and the reinsurance market.

This new capital benefits insurers by allowing them to cede catastrophe risk off their balance sheet more cheaply, said Blackrock, with the result of the increasing availability of alternative capital being the pricing pressure now seen across many lines of reinsurance.

Blackrock expects this pricing pressure will broaden, moving into other lines of the larger global P&C reinsurance market as the new capital boosts insurers underwriting capacity. Blackrock says that it expects to see the broadening of this price pressure in 2014 contract negotiations. Artemis’ readers will be all too aware that this was already evident at the key January reinsurance renewals and that without major catastrophe losses for the sector will likely to be a feature at April and mid-year renewals.

Should those major catastrophe events occur, however, Blackrock does not think we will see a wholesale exit of alternative capital fleeing the markets losses. Quite the opposite, Blackrock says in the report; “Much of the new capital will prove to be permanent and will not flee even after a major catastrophic loss.”

It will increase competition though, and Blackrock said that as a long-term result of this more competitive, highly-capitalised reinsurance market; “Many traditional reinsurers will reevaluate their operations and consider shifting capital into alternative lines of business in order to remain competitive.” As this happens Blackrock notes that insurers and reinsurers will need to design and implement investment strategies that support these new business structures.

That the world’s largest asset manager highlights the growth of ILS, catastrophe bonds and alternative reinsurance capital as a key theme for the re/insurance market to be aware of in 2014, shows that this is not just a passing trend.

Capital coming into the market from third-parties and institutional investors is a significant development within the re/insurance industry, as regular readers will be aware, with the potential to cause real structural change, generate new business models and force companies to innovate and adapt.

Blackrock advises firms take a critical look at their entire business structure and processes and find ways and areas they can innovate. Firms should consider taking bold decisions to move out of existing, overly competitive, business lines and into new ones. Investment processes and structures need to be adapted to suit the new markets insurers and reinsurers serve, says Blackrock.

The full Global Insurance Industry Outlook 2014 report from Blackrock can be downloaded here in PDF format.