Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Alternative reinsurance capital could capture 30% of mid-year renewals


A report, published by the North America research team of financial services and investment banking firm Morgan Stanley, suggests that the mid-year reinsurance renewals could see the participation of alternative reinsurance capital grow to as much as 30%. The report is the result of a research team trip to Bermuda where researchers met with reinsurers, brokers and alternative reinsurance capital managers.

The report says that it is expected that property catastrophe reinsurance pricing is set to fall by 10% to 20% at the mid-year renewals, with most of the executives Morgan Stanley met with citing mid-teens as an expected average level for rates to drop. This weakness from property catastrophe lines of business is beginning to affect pricing in other reinsurance lines, such as non-prop cat and casualty, according to the report. This is a sign that reinsurance pricing power from recent years is fading, according to Morgan Stanley.

With pricing power in reinsurance rates fading buying power is rising and those looking for reinsurance protection at the mid-year renewals will be hoping that this forecast for cheaper cover comes true. Cheaper reinsurance rates could help some primary insurers to improve their balance sheets in 2013, with the savings made helping profits rise for some insurers. Multi-year reinsurance covers are likely to be hotly negotiated at the mid-year renewals as primary insurers look to lock in pricing in case rates were to rise again next year.

The increased supply of reinsurance capacity and capital is the problem, according to Morgan Stanley, with alternative sources of reinsurance capital taking market share away from traditional reinsurers. Alternative capital makes up approximately 15% of the reinsurance market, according to the report, but some believe that alternative reinsurance capital could capture as much as 30% of the mid-year renewal business.

That would be a huge development for the growing third-party reinsurance capital, collateralized reinsurance and insurance-linked securities market. To account for such a large percentage of even just the catastrophe reinsurance market would be a real sign of the growth potential that the market has. It would clearly show that the appetite that institutional investors have for catastrophe and reinsurance risk has now become much more confident and mature enough to really begin to eat away at traditional reinsurers dominance in the marketplace.

Morgan Stanley notes that the growing influence and maturity of the alternative reinsurance capital space is forcing traditional reinsurers to adapt their offering to appeal to the new sources of capital or lose market share. The report cites the growth of Nephila Capital, from $3 billion of assets under management in 2009 to around $8.5 billion today and with 80 clients across 14 reinsurance index products, as a prime example of the way the alternative side of the market has evolved and grown forcing reinsurers to adapt.

Of course we’re now increasingly seeing traditional reinsurers launch their own third-party reinsurance capital management initiatives as they try to capture a share of this growing part of the reinsurance market.

Morgan Stanley note that traditional reinsurance expertise, underwriting experience, relationships and access to risk, will remain ‘a value add component of the supply chain‘, but closes that section of the report by saying that ‘capital markets convergence has finally arrived in reinsurance.’

30% of the mid-year reinsurance renewals is a huge amount of risk capital for the alternative providers to put into play. Whether it is that large a share, or just 15% in line with the rough estimates of the size of the market, one thing is for sure, this percentage of the reinsurance market seems to be here to stay and is expected to grow over time.

Register today for ILS NYC 2023, our next insurance-linked securities (ILS) market conference. Held in New York City, February 10th, 2023.

Artemis ILS NYC 2023 - Insurance-linked securities conference in New York City

Get a ticket soon to ensure you can attend. Secure your place at the event here!

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.