Surge in convergence capital triggers downward pressure on pricing at June 1 renewals | Canadian Insurance

Surge in convergence capital triggers downward pressure on pricing at June 1 renewals

US $10B of new capital entered market in last 18 months: Guy Carpenter

The reinsurance sector witnessed dynamic capital growth in 2012 and 2013, largely due to an influx of capital from alternative sources, states a new report from Guy Carpenter.

In its June 2013 renewal briefing, Guy Carpenter reports that this surge in alternative or “convergence” capital has changed the nature of the sector’s capital structure, as investors are growing increasingly comfortable with supplying capacity through a convergence of both traditional and alternative vehicles.

Read: 2013 reinsurance market report

According to the briefing, this market dynamic has also begun to significantly impact 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.

“The reinsurance sector has exited the fairly consistent post-Katrina Florida property catastrophe pricing range,” said David Flandro, gobal head of business intelligence at Guy Carpenter, in a press release. “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.”

According to Guy Carpenter, for 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.

Read: April 1 renewals see reinsurance pricing stabilize

“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 collateralized reinsurance activity triggering downward pressure on rates in the traditional market in order to remain competitive.”

Approximately USD10 billion of new capital entered the market in the form of catastrophe bonds, sidecars and collateralized structures over the last 18 months. Capital emanating from alternative markets, including catastrophe bonds, collateralized reinsurance, industry loss warranty (ILW) products and retrocessional reinsurance, grew significantly during this period and now accounts for an estimated USD45 billion, approximately 14% of global property limit.

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 U.S. coast served as a reminder of the loss potential of hurricanes in the Atlantic, even for areas where landfalls are comparatively rare. 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.

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