Market conditions suggest alternative capital will increase further: Guy Carpenter’s Rousseau

As alternative capital continues to grow, it’s currently estimated share of 20% of the global re/insurance industry is largely an underestimation, according to Guy Carpenter’s Laurent Rousseau, who argues that current market conditions would suggest that it will increase further before it stabilises or shrinks.

Broker Guy Carpenter recently published a new report that examines the accelerating integration of alternative capital into the global reinsurance market, as well as the implications for capacity, pricing, and market structure.

As mentioned, the broker’s report indicates that alternative capital now represents nearly 20% of the estimated US $660 billion in global reinsurance capital, an increase from 13% in 2013.

Commenting on the difficulty of forecasting this integration, Laurent Rousseau, CEO of Global Capital & Advisory and EMEA, Guy Carpenter, noted that the industry should prepare for a landscape that is far more fluid than current estimates suggest.

“It would be foolish to predict the ultimate balance of traditional and alternative capacity. In the same way, approaching strategy in a deterministic way with binary outcomes is excessively risky: reinsurers might instead seek to maintain optionality, and position themselves in order not to miss potential market ruptures,” Rousseau said.

He continued: “And while the ultimate balance of alternative versus traditional sources of capital is not possible to predict, we know alternative capital will not go away. Its current share of 20% of the (re)insurance industry is probably largely underestimated, and current market conditions would lead to believe it will increase further before it stabilizes if not shrinks.”

The report further notes that while most reinsurers have a catastrophe bond fund, few have transitioned into nimble risk traders with broad insurance-linked securities (ILS) platforms.

In contrast, investment banks maintain trading desks that exhibit different levels of risk tolerance and assume risks on their balance sheets.

There are essential distinctions in the operational methods of banks and insurance companies, which highlight fundamentally different underlying risks they address: insurance risks tend to be persistent, more challenging to securitise, and frequently pertain to fat tail events.

“Yet, while history does not repeat itself, it rhymes. Reinsurers would often be well advised to look at how the broader capital markets are evolving to understand partnering with capital markets has long-term, structural value,” Rousseau added.

Also read: Alt capital sustainability hinges on modeling, transparency, careful product sequencing: GC’s Rousseau