By Rebecca ZuillLloyds’ News and Insight reported that “the word convergence was on everyone’s lips” when leading figures in reinsurance gathered at Monte Carlo last week for the industry’s annual Rendez-Vous convention.News and Insight said that delegates heard how this year is likely to set a record for new cat bonds issued. “Issuance for the first half was $4 billion, and $17.5 billion of total limit was outstanding as of June 30. Growth is being driven by pension funds’ appetite for alternative, non-correlating investments at a time when interest rates are low.”And Reinsurance blogger Artemis said that one of the points of discussion at Monte Carlo was just how much capital might flow into the insurance and reinsurance market as insurance-linked securities and other fully collateralised instruments or vehicles from alternative and third-party investor sources.The blogger also stated that reinsurance broker Aon Benfield was one of the firms that have now moved past the discussion of when the reinsurance and capital markets will converge, progressing to discussion of the post-convergence reinsurance world where alternative capital becomes a normal and growing part of the capacity deployed globally in reinsurance markets.Aon Benfield’s report on the topic, called ‘Post Convergence: The Next USD100 Billion’, stated that insurers and reinsurers: “will benefit from the next, and much more transformative, USD100 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.“Reinsurers in the post-convergence market will innovate their capital structures to incorporate the additional USD$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.”Artemis stated that Aon Benfield believes that the post-convergence reinsurance landscape will continue to bring new, collateralised and unlevered products to market which can be more beneficial to insurers than traditional reinsurance products when it comes to peak peril risk transfer.“This is certainly key to the reinsurance market finding space for another $100 billion of capital. Either innovation will have to drive new opportunities for this capital to be deployed or there will have to be some shrinkage of capital ...”The blogger added: “So, new products, greater innovation and more penetration of fully-collateralised, capital markets backed reinsurance and risk transfer products will bring benefits to reinsurance buyers, but for reinsurance sellers there is also a need for structural innovation, changes to business models, in terms of capital structures and the way they leverage external investors and partner with third-party capital.”Lloyds News and Insight also reported John Cavanagh, CEO of Willis Re as saying that the influx of third party capital, coupled with changes to reinsurance buying patterns and tougher regulation, is leading to growing complexity in the reinsurance market. “Solid analytical advice and market knowledge through intermediation is needed now more than ever.”They also reported that Lloyd’s chairman John Nelson, speaking at a Rendez-Vous breakfast briefing organised by PWC, as saying insurance linked securities have proved their worth as reliable sources of return for investors and for their ability to pay out claims.“I see the influx of this sort of capital as a real opportunity for the Lloyd’s market, particularly as this type of investor is likely to be far from passive — and seek an understanding of the nature of insurance and reinsurance and the nature of risk,” he said. “From a Lloyd’s perspective, this sort of capital places value on disciplined underwriting, good supervision and good risk-adjusted pricing — all areas, I believe, in which we excel.”Oversupply and the danger of losing the connection between capital and the risk itself, and therefore the insured are potential threats to the reinsurance industry from this capital, Mr Nelson said.News and Insight said on the question of oversupply, Mr Nelson believes the new demands from emerging growth countries, and the changing and challenging nature of new risk, will provide growth for reinsurers over the coming years.Richard Booth, vice chairman of Guy Carpenter & Co, was reported in the online news publication as saying at the reinsurance broker’s press conference that emerging and mature risks offered opportunities for growth. “Take catastrophe risk. A common view is that this is a saturated commodity market, yet between 1980 and 2012, 74 percent of total global economic losses from natural catastrophes were not insured. The gap between economic and insured catastrophe losses continues to widen.”Recent research from Lloyd’s found an annualised $168 billion insurance deficit that leaves 17 high growth countries severely exposed to the long term costs of catastrophes.“Elsewhere, new and expanding risks such as cyber, renewable energy, food and water security and longevity to name but a few present opportunities and gaps that can be filled by insurers and reinsurers,” Mr Booth added.