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Alternative reinsurance capital ‘Uberized’ re/insurance: Aon Benfield


The influx of alternative capital in the global insurance and reinsurance landscape, from traditional and increasingly capital market sources has caused the sector to experience ‘Uberized’ supply competition, according to reinsurer Aon Benfield.

Referring to the remarkable growth of technology & transportation company Uber, Aon Benfield questions whether the insurance industry is the first sector to experience similar growth, in terms of “increased supply competition,” which it notes as a “potential definition” of the phrase, following the impacts of excess capacity in the global reinsurance sector.

“Increased supply competition, and an increased fungibility of capital entering and exiting the market, has been a hallmark of the last twenty years,” says Aon Benfield, adding that since the first insurance securitization and over the last 25 years, whenever a dislocation in the market has taken place a surge in new capital deployment has followed.

“In 2013 alternative capital moved from being a price-taker to a price-maker for peak US catastrophe risk, with the effect of steeply driving down prices,” says Aon.

The growth of alternative reinsurance capital has been well documented in recent months, increasingly so as its impacts are felt beyond property catastrophe reinsurance lines and into primary business, or tentatively into lines such as casualty risk.

Intensifying competition across many risk transfer markets and a sustained period of pressured rates, exacerbated by alternative capital, has caused insurers and reinsurers globally to explore consolidation options as the need for scale and relevance appears essential.

“The increase in capital over the last ten years has been slightly lower than the GDP growth rate, but since the 2008 recession it has far exceeded the amount necessary to keep pace with exposures. Over the last ten years, reinsurance capital has grown more quickly than GDP, in part driven by the growth of alternative capital,” says Aon.

Aon Benfield notes that currently $68 billion of alternative capital is deployed in the industry, “and with it having an outsized influence on catastrophe risk pricing, the insurance industry can truly be said to have been ‘Uberized’ in the sense of being subject to greatly increased supply competition.”

In its report, ‘Insurance Risk Study 2015, Global Insurance Market Opportunities,’ Aon Benfield notes how hedge fund backed reinsurers and similar start-ups have an appetite that reaches across the risk spectrum, including many lines which are existing and stable, where its presence would likely heighten competition and drive down rates.

The issue currently with the abundance of capital in the sector is that it’s struggling to find a home in any emerging, or underserved risks in vulnerable and often desperate parts of the world, as well as expansion in developed markets. The base of reinsurance capital continues to be driven by peak exposures, which Aon highlights today as being U.S. wind.

But as insurance and reinsurance penetration levels in emerging regions of the globe like Asia-Pacific rise, along with rapid urbanisation in tropical storm hot spots, migration to hazardous coastal areas and rising asset values, the deployment of reinsurance and insurance-linked securities (ILS) capital will shift to these regions, as the capital will always look to follow the risk.

But that doesn’t mean the industry needs to wait until the exposure becomes heightened to act and innovate to provide valuable risk transfer solutions, utilising the glut of alternative and traditional reinsurance capital.

“We believe abundant capital, providing capacity for existing and emerging risks, will be available to support significant growth in the insurance industry over the coming decade,” notes Aon Benfield, signalling a belief shared by the majority of the industry now, that alternative capital is here to stay and should be embraced and put to work across the risk landscape.

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