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Convergence of capital sources is changing the reinsurance marketplace: Guy Carpenter


The latest global reinsurance broker to publish an April reinsurance market renewals report containing bullish statements about the growing influence of third-party reinsurance capital on the wider marketplace is Guy Carpenter. In its press release, published this morning, Guy Carpenter reports that ample reinsurance capacity, assisted by continued convergence of traditional and alternative capital sources has resulted in largely stable April reinsurance renewals.

Guy Carpenter believes that the convergence of traditional and alternative capital sources is now changing the reinsurance marketplace, with non-traditional capacity now accounting for an estimated 14% of global property catastrophe reinsurance limit. The broker reports that the reinsurance market has seen ‘dynamic capital growth’ which has been stimulated by the increasing inflows of third-party reinsurance capital. This echoes the sentiment of the other major brokers and those who have published recent market reports, links to many of these pieces can be found at the foot of this article.

Guy Carpenter says that this market dynamic has helped insurers at the 1st April renewal. Reinsurance pricing across Asia generally stabilised, or even fell a little, as the impact of the 2011 Tohoku earthquake and the Thailand flooding generally gave way to a trend towards modest softening of rates.

Japan saw moderate rate decreases for most catastrophe excess of loss lines, but the losses from Tohoku and Thailand limited the downward pressure, resulting in only slight declines. Korea on the other hand saw increases to catastrophe excess of loss treaties on a risk adjusted basis driven by three typhoon impacts and the resulting losses in 2012. India saw reinsurance buyers take advantage of a softer rate environment to increase attachment points or grow exposure while maintaining spend levels, making the renewals all about expanding coverage.

A number of major U.S. property catastrophe reinsurance treaties renewed and these saw pricing down generally in the single digit range, but Guy Carpenter notes that non-traditional capacity has impacted this market and expects it to continue to do so in the upcoming mid-year renewals. It’s going to be extremely interesting to see how the dynamic between traditional and non-traditional reinsurance capacity plays out at the mid-year renewals, there is every chance right now that third-party reinsurance capital could play a greatly expanded role this year.

David Flandro, Global Head of Business Intelligence at Guy Carpenter, commented; “The April 1 reinsurance renewal saw pricing stabilize in most regions as insurers benefited from an environment of dynamic capital growth. Much of this growth emanated from non-traditional sources, confirming that the convergence between traditional reinsurance and capital market solutions has now occurred.”

Guy Carpenter was among the first to state that we’re now in a reinsurance market where sources of risk capital have converged between the traditional and the new non-traditional. The market has clearly demonstrated at these recent renewals that capital sources such as specialist insurance and reinsurance linked investment funds, pension funds, wealth managers, endowment funds, sovereign funds, other insurers, family offices and high-net worth individuals are having an increasing level of influence on the marketplace.

Flandro continued; “Guy Carpenter feels that an accurate understanding of how the market is converging and where the capacity will be deployed is essential to creating new competitive advantages at future renewals. This begins with an accurate and rigorous study of the sources and uses of capital, as well as an accurate quantification of available and deployed reinsurance capacity. Guy Carpenter is uniquely positioned to assist clients and reinsurers in this area in the pursuit of opportunities for profitable growth.”

Here the broker hits on a very valid point, that gaining an understanding of these new sources of third-party reinsurance capital will be vital. It will also be vital for insurers and reinsurers to quickly build relationships with alternative capital providers, gain an understanding of the product offerings and how they prefer to deploy their capital and learn to appreciate the return ambitions of different types of investors.

By understanding the new third-party capital trends in the market insurers and reinsurers will be able to position themselves to embrace this capital and find ways to profit from it, either through optimisation of their own coverage needs or by making efforts to attract this capital and begin to manage it themselves.

You can read the full press release from Guy Carpenter here.

Here are some of our recent articles on the third-party reinsurance capital trend that may be of interest if you missed them (older articles first):

Consolidation and pricing pressure possible as reinsurance convergence continues

Capital flow in the reinsurance market has changed: PartnerRe CFO

Insurance-linked securities (ILS) set to grow its share of reinsurance capacity

Pension fund capital inflows could dampen returns over time: KBW

Innovative and client focused approach required to drive growth in ILS

As ILS investors compete with traditional reinsurers will they stay the course?

Fast capital? Welcome to the ‘new normal’

Lloyd’s: Third-party ILS capital is both a threat and opportunity

Emerging model of ‘fast capital’ threatens traditional reinsurers: Willis Re

ILS pricing drops by up to 70% as reinsurance capital rises: Aon Benfield

Rush to allocate capital creating a soft ILS market: Lane Financial

Ability to attract, deploy third-party capital important for reinsurers: Aon Benfield

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