Market to benefit from $100 billion alternative capital – analysts

Insurers and reinsurers will benefit from the next, and much more transformative, $100 billion of alternative capital that will enter the reinsurance business over the next five years. The value proposition of reinsurance will improve as the cost of underwriting capital is reduced for reinsurers. The post-convergence market brings unlevered collateralised products that are more accretive to insurers than traditional reinsurance for peak risks, analysts at Aon Benfield have said.

Reinsurers in the post-convergence market will innovate their capital structures to incorporate the additional $100 billion of alternative capital flows.

Reinsurers will engage in three broad categories of transactions with investors: (a) insurance linked securities (ILS or catastrophe bonds) to lower the cost of underwriting capital supporting peak tail risks; (b) sidecars to lower the cost of underwriting capital across the portfolio risk spectrum and (c) formation of asset management divisions that will allow reinsurers the opportunity to accept asset management mandates from investors.

“Our compilation of reinsurance industry capital which now stands at $ 510 billion has included all measures of equity capital deployed in the business by reinsurers as well as important government reinsurance facilities.

“While we test the predictiveness of reinsurer capital as a challenge in our reinsurance pricing model, we suspect that its predictive value is in decline. The influence of lower yields ushering substantially more, but harder to measure, capital to reinsurance risk taking is very meaningful,” the analysts said.