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Alternative sources of capital keep reinsurance prices low

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An influx of capital from alternative sources has triggered downward pressure on reinsurance pricing at June 1 renewals for the industry.

This from Guy Carpenter & Company, which reports that the reinsurance sector has witnessed “dynamic capital growth in 2012 and 2013, spurred by an influx of capital from alternative sources”.

Approximately USD10 billion of new capital has entered the market in the form of catastrophe bonds, sidecars and collateralised structures over the last 18 months as a growing number of investors have been attracted to reinsurance by higher yields and low correlations.

Carriers will be closely monitoring this year’s Atlantic hurricane season as its outcome could influence the direction of reinsurance pricing into next year’s renewals

In its June renewal briefing, Guy Carpenter said it finds that this surge in alternative or “convergence” capital has changed the nature of the sector’s capital structure, as investors grow increasingly comfortable with supplying capacity through a convergence of both traditional and alternative vehicles.

“This market dynamic has also begun to impact significantly reinsurance pricing for peak property catastrophe risks in the US, with surplus capacity and lower target returns driving downward pressure on pricing for June 1 renewals and likely through the remainder of 2013.”

David Flandro, global head of Business Intelligence at Guy Carpenter, said: “The reinsurance sector has exited the fairly consistent post-Katrina Florida property catastrophe pricing range. 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. Guy Carpenter is well placed to enable clients to capitalise.”

Guy Carpenter noted the first time, there were several instances of insurance linked securities (ILS) pricing “delivering a more cost effective risk transfer solution than traditional vehicles”.

While traditional reinsurance has certain capital constraints for peak risk zones, such as Florida, the lower cost of capital assumptions afforded to third-party funds gives them the potential opportunity to charge less for peak US wind risks than traditional reinsurers, Guy Carpenter said.

Lara Mowery, global head of Property Specialty at Guy Carpenter said: “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.”

Capital emanating from alternative markets, including catastrophe bonds, collateralised reinsurance, industry loss warranty (ILW) products and retrocessional reinsurance, has grown significantly in the last 18 months and now accounts for an estimated USD45 billion, approximately 14 percent of global property limit.

Guy Carpenter noted reinsurance pricing has fluctuated moderately over the last two years during the Florida renewals.

“Expectations going into 2013 were influenced by the significant excess of available capacity and the fact that Florida has been hurricane loss-free for seven consecutive years.”

Elevated hurricane activity is expected to continue this year and the 2013 hurricane season will play an important role in determining loss activity for the remainder of the year.

There is a general consensus that 2013 will see activity that meets or exceeds the 1995-2012 average of the current “active period”.

In 2012, the destructive landfall of Superstorm Sandy along the Northeast US coast served as a reminder of the loss potential of hurricanes in the Atlantic, even for areas where landfalls are comparatively rare.

Close watch: An image provided by NASA from the Terra satellite shows Tropical Storm Andrea as it moves across the Gulf of Mexico and approaches Florida. Reinsurers will be closely monitoring this year’s Atlantic hurricane season as its outcome could influence the direction of pricing into next year’s renewal
The High Hazard surf warning flag flies in front of the Atlantic Beach, Florida, Ocean Rescue station was nearly blown away by the winds of Andrea.

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Published June 10, 2013 at 9:00 am (Updated June 09, 2013 at 5:02 pm)

Alternative sources of capital keep reinsurance prices low

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