New capital continues to reshape the reinsurance market: Guy Carpenter

The reinsurance market of the future will be reshaped as growing pools of third-party capital are increasingly leveraged, alongside ILS structures, to bring efficiency into the reinsurance industry, according to broker Guy Carpenter.

Over the last two years, Guy Carpenter believes that as much as $20 billion of new reinsurance capital has flowed into the market through investments in insurance-linked securities, such as catastrophe bonds, ILS funds, sidecars and collateralized reinsurance vehicles, as well as the formation of hedge fund linked reinsurance companies.

This reshaping is now bringing benefits to reinsurance buyers such as public entities, as innovations allow them to more directly access the capital markets for risk transfer, sometimes even bypassing the reinsurance market entirely and using ILS as a form of insurance capital.

“Guy Carpenter and GC Securities have pioneered these innovative forms of risk transfer, and we are committed to finding the optimal form of risk mitigation for our clients from the vast array of potential solutions across all markets,” commented David Priebe, Vice Chairman, Guy Carpenter & Company LLC.

As the quality of the available catastrophe models increases, making the compartmentalisation of risk easier, and as capital markets investors become more comfortable with innovative structures, terms and conditions, Guy Carpenter expects more forms of risk are likely to directly access the capital markets in ILS form.

The limit placed using ILS and the capital markets continues to grow and we now see some products broadening the line of business and product focus of ILS managers, said Guy Carpenter in a report released at the Monte Carlo Rendez-vous. The result is that the usage of capital markets capacity in reinsurance and risk transfer in 2014 has seen a continuation of the strong growth trends witnessed in 2013.

Collateralized markets are expected to increase in importance to the markets, as an alternative to both traditional reinsurance and ILS, which will result in rated reinsurance markets increasingly using the same triggers and techniques creating a continued convergence between the reinsurance and capital markets, Guy Carpenter believes.

These trends are expected by many at Monte Carlo to reshape the reinsurance market completely. Some opinions suggest that we will not recognise the reinsurance market in 20 years time, as it looks more like a risk and capital market, with pools of expertise and fund management brought together by risk transfer.

Others believe the change may be less dramatic, more of a deeper convergence and wider risk capital agnosticism. But change, it is agreed by everyone, is in the reinsurance markets future and ignoring these trends will end in a marginalised future for many of the markets incumbents, if they are not careful.

The reshaping of the reinsurance market has been underway for many years and has many more left to run. Being one step ahead of the change is key, which reinforces two of the key themes from Monte Carlo, the need to adapt and to innovate.

You can find the full report from Guy Carpenter in PDF format here.