Alternative capital influx drives down price at latest reinsurance renewals

Surplus capacity resulting from an influx of alternative capital into the reinsurance market triggered downward pressure on pricing at the latest renewals, according to Guy Carp. They expect this trend to continue for the rest of the year.

According to her, dynamic capital growth, spurred by an influx of capital from alternative or convergent sources, has changed the very nature of the reinsurance sector’s capital structure, said the intermediary in its June 2013 renewal briefing.

This market dynamic has begun to impact ‘significantly’ reinsurance pricing for peak property catastrophe risks in the US, it reports. “The reinsurance sector has exited the fairly consistent post-Katrina Florida property catastrophe pricing range,” said David Flandro, global head of business Intelligence at Guy Carpenter.

“This has been driven by a very real change to the sector’s capital structure and this change is continuing unabated. New sources of capacity are emerging with implications for pricing, availability and structure,” he added.

Approximately $10 billion of new capital has entered the reinsurance market in the form of catastrophe bonds, sidecars and collateralised structures over the last 18 months, according to Guy Carp.

A growing number of investors have been attracted by higher yields and low correlations. They grow increasingly comfortable with supplying capacity through a convergence of both traditional and alternative vehicles.

Capital emanating from alternative markets now accounts for an estimated $45 billion, approximately 14 percent of global property limit.

“After years of evaluating the catastrophe bond market as a viable risk asset class, investors are now comfortable breaking away, or ‘decoupling’, from price levels set by the traditional market,” said Lara Mowery, global head of Property Specialty at Guy Carpenter.

“The impact has been dramatic this year, with robust catastrophe bond, sidecar and collateralised reinsurance activity triggering downward pressure on rates in the traditional market in order to remain competitive,” she continued.