The growth of non-traditional reinsurance capacity to April 2013


Non-traditional reinsurance capacity, largely sourced from third-party institutional and capital market investors and recently increased to $44 billion in size, is exerting increasing influence on the global property catastrophe reinsurance market. That’s a statement that we can all agree on now that we’ve seen growing evidence from catastrophe bond and ILS pricing and the recent April reinsurance renewals.

Earlier today we published an in-depth interview on this topic of non-traditional reinsurance capacity with David Flandro, Global Head of Business Intelligence at reinsurance broker Guy Carpenter. In our discussion with David he gave us a breakdown of the $44 billion of non-traditional capacity and how it is split into catastrophe bonds and insurance-linked securities (ILS), collateralized reinsurance, retrocessional reinsurance and industry loss warranties (ILW’s).

As we noted in the interview with David, less than a year earlier (June 2012) Guy Carpenter put the amount of non-traditional property catastrophe reinsurance capacity a lot lower at $34 billion, which means that this portion of the reinsurance market has grown by 29% or $10 billion in just 10 months.

So now that we have this breakdown of the non-traditional or alternative reinsurance capital by the types of vehicle or contract it has been deployed in we can compare the April 2013 numbers to the breakdown Guy Carpenter published at the end of June 2012 to see how the constituent parts have increased or changed.

Firstly, here’s the raw data on non-traditional reinsurance capacity by source from Guy Carpenters report in mid-2012 compared with the recent April 2013 numbers. We also include the change or increase in terms of growth in dollars and percentage.

Mid 2012 ($B) April 2013 ($B) Change ($B) Change (%)
Cat bonds & ILS 13.5 15 +1.5 +11%
Collateralized reinsurance 9 13 +4 +44%
Retrocession 6.5 10 +3.5 +54%
Industry loss warranties 5 6 +1 +20%

Now here’s the same data in a much nicer to view format. Firstly the amount of non-traditional reinsurance market capacity, or alternative reinsurance capital, compared:

The growth of alternative reinsurance capital, June 2012 - April 2013

The growth of alternative or non-traditional reinsurance capital, June 2012 to April 2013 Source: Guy Carpenter

And secondly the composition of the non-traditional reinsurance market capacity, or alternative reinsurance capital, compared:

The breakdown of alternative reinsurance capital, June 2012 versus April 2013

The breakdown of alternative or non-traditional reinsurance capital, June 2012 versus April 2013 - Source: Guy Carpenter

Now that we have these two sets of data to compare it’s much easier to visualise and understand where the inflows of third-party capital have been deployed in the catastrophe reinsurance market over the last year.

From the above data it’s clear to see that the most impressive growth has actually been in non-traditional retrocessional reinsurance market capacity, having increased in size by 54% over the roughly nine months, while collateralized reinsurance contracts come a close second, having jumped by 44% in under a year. This isn’t that surprising given that those are the markets which have seen the most new entrants in recent years, market entrants who have been religiously fund-raising almost all the time.

Industry-loss warranties (ILWs) haven’t had the easiest of times over the last year, with difficult renewals and uncertainty on pricing, so it’s not surprising to see that growth hasn’t been so big there at just 20%.

Cat bonds and ILS have seen typical growth of 11% in capacity in the last ten months, growing from the $13.5 billion Guy Carpenter reported mid-last year to $15 billion by their reckoning at April 2013.  This is perhaps not as impressive growth as some would expect, but actually the cat bond market has tended to grow around 5% per  quarter and its growth is always skewed somewhat by issuance and maturity patterns and never quite reflects inflows accurately.

Overall, the growth of non-traditional reinsurance capacity from third-party and alternative sources of reinsurance capital has been very impressive. Growth of this now key part of the reinsurance market is expected to continue and given the investor appetite for catastrophe reinsurance risk and increasing interest in the sector we could see another healthy jump in capacity by the middle of this year.

Don’t forget to read our article from earlier this week on Guy Carpenters April 1 reinsurance renewals report and the interview with David Flandro which was published earlier today.

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