The influence of the capital markets and alternative reinsurance capital grew in 2013, with new inflows of third-party reinsurance capital during the year at approximately $10 billion, according to data released today by reinsurance broker Guy Carpenter.
At a press briefing held in London this morning, executives from Guy Carpenter revealed that new third-party capital accounted for most of the growth in dedicated reinsurance sector capital over the course of 2013.
According to new data from the reinsurance broker, which it has derived in conjunction with rating agency A.M. Best after a significant sector analysis effort, dedicated reinsurance sector capital grew from $310 billion at the end of 2012 to $322 billion at the end of 2013.
David Flandro, Guy Carpenter’s Global Head of Business Intelligence, explained that strong net income from reinsurers was offset to some degree by share repurchases, dividend payouts and unrealised losses, some of which were due to increases in U.S. Treasury yields.
However, the approximately $10 billion of new third-party capital entering the reinsurance sector during 2013, along with some new capital issuances, helped to ensure that overall dedicated reinsurance sector capital grew, reaching the figure of $322 billion by year-end.
Also helping to ensure reinsurance sector capital grew was the below-normal level of global insured losses in 2013. Guy Carpenter estimate the total at around $40 billion, below the $50 billion to $60 billion average. This low-level of losses helped to ensure that reinsurers ended the year with reasonable incomes despite declining reinsurance rates.
On Guy Carpenter’s numbers 2013 was a record for catastrophe bond issuance. From Guy Carpenter’s perspective 2013 catastrophe bond issuance stood at $7.083 billion and the amount of catastrophe bond risk capital outstanding at the end of 2013 reached $18.58 billion.
Guy Carpenter’s numbers only include 144A property catastrophe cat bond issuance, so not life, mortality or some of the private deals which are included in the Artemis Deal Directory figures of $7.64 billion of cat bond issuance in 2013 and a market size of $20.5 billion at the end of the year.
The extremely healthy catastrophe bond issuance in 2013 and record size of the outstanding cat bond market is still not sufficient to meet the demand from investors for new cat bond paper.
David Flandro commented; “The market is growing and the appetite for these things seems to be a lot bigger than we can provide right now. When I talk to cat bond underwriters, when I talk to ILS fund managers they basically say please, help us issue more cat bonds or issue more cat bonds, because there is huge investor demand out there.”
What is helping the cat bond market to grow and why is more third-party capital coming into the insurance and reinsurance sector? According to Guy Carpenter the investor base has now become sufficiently secure in making allocations to ILS that there could be further growth ahead.
Flandro continued; “There are a lot of pension funds and sovereign wealth funds who have been examining insurance-linked securities and insurance-linked investments for ten or fifteen years now and they seem to have finally got very comfortable with them and they’re investing in the space in earnest.”
Flandro explained that pension funds in particular are increasingly moving into the insurance and reinsurance linked investment space. Guy Carpenter’s research suggests that with global pension fund assets under management sitting around $30 trillion, the portion potentially available for allocation to the ILS and insurance-linked investments space is estimated at $900 billion.
That huge sum is significantly larger than the approximately $45 billion or 15% of global property cat limit (an early estimate from Guy Carpenter) provided by alternative reinsurance capital sources such as pension funds and institutional investors today. This clearly shows the opportunity for ILS managers and reinsurers to embrace this capital and find ways to pull more of it into the sector and it is no surprise that ILS managers are saying they need more cat bond issuance to help soak up interested capital.
However, Nick Frankland, CEO of Guy Carpenter’s EMEA operations, said that alternative reinsurance capital at the January renewals is still largely restricted to retrocession and U.S. property catastrophe risks. His explained that Guy Carpenter saw virtually zero contribution to the reinsurance renewals in EMEA and Latin America from third-party capital.
So finding opportunities for growth for alternative reinsurance capital remains a hot topic and one which is sure to be discussed frequently in 2014. With capital growth up during 2013 and more interest from investors apparent, but the reinsurance market more competitive and actual reinsurance opportunities no bigger due to rising primary insurer retentions, the focus now has to be on how to put alternative capital to work in new areas of the market and new regions of the world.
As ever, innovation was mentioned as a potential driver of opportunity for both alternative and traditional reinsurance capital as well as attempting to close the gap between economic and insured losses in developing markets such as Asia. David Flandro explained that alternative reinsurance capital tends to spur innovation and some unique covers have been developed.
Now traditional reinsurers have found themselves in an environment where they have been spurred on to innovate and hence the enhanced terms offered at January reinsurance renewals. Innovation tends to beget innovation in a market and it will be interesting to see where the markets, both traditional and alternative, can push themselves to in 2014.
Third-party reinsurance capital is here to stay, in Guy Carpenter’s view, but where it goes next is the big question according to Nick Frankland. Some of the ILS players will be in it for the long-term while he suggested that others may find themselves marginalised.
Flandro explained that while rising interest rates and high levels of catastrophe losses may scare some third-party capital from the market, the fundamental reason that it’s in the sector is that reinsurance is now seen as a viable asset class. So while some capital may leave the space Flandro said he believes that the bulk of the alternative capital in the reinsurance sector is here to stay and likely to increase.
Also read our coverage of Guy Carpenter’s January reinsurance renewal commentary from last week: Capital, convergence, competition = reinsurance renewal rates fall.