The 1st July reinsurance renewals season saw subdued price changes as ample capital and capacity moderated pricing pressures through the second quarter of the year, says Guy Carpenter, the reinsurance brokers, latest quarterly reinsurance market report. Inflows of alternative and non-traditional reinsurance capital, from sources such as capital market investors and hedge funds have been a significant feature, adding between $6 billion and $8 billion of new capacity since 2011, and helping to slow the return of a hard reinsurance market.
This non-traditional and alternative reinsurance capital has entered the market through a variety of vehicles and instruments, including catastrophe bonds and insurance-linked securities, sidecars and collateralized reinsurance vehicles. Benign catastrophe losses experienced so far this year have also helped to keep pricing subdued and bolster reinsurance capital and capacity.
Earlier today we wrote about Guy Carpenters comments on the catastrophe bond market from this report, while here we will focus more on their commentary on the alternative reinsurance capital and convergence sectors, retrocession and the industry loss warranty markets.
Guy Carpenter have seen an increased participation in property reinsurance from non-traditional sources, as evidenced by recently launched sidecar vehicles, and this has had some impact in certain areas. On property retrocession Guy Carpenter note that the 1st July renewals are more opportunistic as protection buyers seek to optimise coverage before the U.S. hurricane season begins in earnest. The trend towards property retrocession rate rises continued at these renewals but at a less aggressive rate than increases seen earlier this year.
Guy Carpenter noted a trend for reinsurers active in the retro market to hold onto capacity rather than deploy it at any cost and capacity outstripped demand for some peak peril covers. Rather than accept rate reductions reinsurers preferred to hold onto capacity until a more attractive offer came along. Many were satisfied with the amount of limit deployed but there are retro reinsurers out there with capacity available if the price is right, something we’re sure protection buyers will be bearing in mind as we move deeper into the U.S. wind season.
Generally retro buyers were able to secure the cover they required and the trend towards supplementing cover with newer products such as Country Weighted Industry Loss Warranties (CWIL) continued. Industry-loss warranty (ILW) activity has been limited in recent weeks and rates have dropped as capacity providers eager to deploy capital lowered their rates late in the buying period as the U.S. wind season began.
Guy Carpenter note that while the catastrophe bond market has become the most visible component of direct capital markets participation and capacity in the catastrophe reinsurance market it is by no means the only one. Overall cat bonds make up less than half of the non-traditional, capital market sourced, reinsurance capacity in the market place at any one time. The faster growing area may actually be collateralized covers, within reinsurance, retro and ILW where much of the new capacity is coming from capital market sources. The chart below from Guy Carpenter breaks down the types of capacity in the non-traditional catastrophe reinsurance market.
Collateralized reinsurance and sidecars are particularly meaningful sources of risk transfer capacity now as well. The influence of all this additional capital markets money was evident in recent renewals as rate increases were generally lower than had been expected.
Guy Carpenter make some interesting observations on how the non-traditional and capital market sourced capacity of the catastrophe reinsurance market is developing and increasing the options available to both protection buyers, sellers and investors. Protection buyers are benefitting from streamlined access options and flexibility from capacity providers in respect of terms and conditions, structures and triggers. This increasing sophistication of the convergence portion of the reinsurance market is also resulting in more investment opportunities and options as well.
There are now more options available for investors to deploy capital into the catastrophe risk asset class, thanks to this increasing flexibility and sophistication. As each of the types of capacity have different benefits and drawbacks, there are more options for investors to both deploy capital into an investment opportunity more suited to their risk and return requirements and more options to access diversifying investments as well.
Guy Carpenter closes this section of their report by saying that the growth of options and ability to rapidly implement them is an important ongoing development for the reinsurance market as a whole and the non-traditional sector of it. This maturing of the market is allowing the right kind of capital to gain access to the right kind of catastrophe risk investment opportunities and this can be actioned more swiftly than before which is important to these classes of investors. This evolution in the convergence reinsurance market should continue to have a stabilising effect on pricing and capacity environments and Guy Carpenter say it will be able to become more sticky, and so stay within the market, as it will become more loss resistant.