Influx of non-traditional reinsurance capacity changing marketplace say brokers

According to a briefing on the 1 April renewals by Guy Carpenter, 'dynamic capital growth and ample reinsurance capacity' has resulted in a 'relatively stable' market place. With non-traditional capacity now contributing an estimated 14% of global property catastrophe capacity, the broker said that the convergence of traditional and alternative capital sources 'is changing the marketplace'. It is having a 'significant impact' on property catastrophe business in the US, the broker adds, where traditional reinsurance pricing has decreased on similar coverages from the 1 January renewal.hideThis environment also benefited reinsurance buyers in the Asia Pacific region, for which 1 April is a significant renewal date. Reinsurance pricing in Asia generally stabilised or fell marginally as the adverse conditions experienced in the wake of the Tohoku earthquake in Japan and Thailand flooding in 2011 generally gave way to modest softening. David Flandro, Global Head of Business Intelligence, Guy Carpenter & Company, LLC, said: "The 1 April reinsurance renewal saw pricing stabilise in most regions as insurers benefited from an environment of dynamic capital growth. Much of this growth emanated from non-traditional sources, confirming that the convergence between traditional reinsurance and capital market solutions has now occurred." According to Mike Van Slooten, Head of Aon Benfield's International Market Analysis team, capital providers have targeted the reinsurance market as a good investment option given the low interest rate environment, 'adding to the competitor landscape'. "Diversified yield seeking investors are now adding material pressure (in terms of price and value competition) and benefits (in terms of lower cost underwriting capital) to the reinsurance market. We expect material changes to the capital structure of the largely equity financed reinsurance market as material new flows of capital are integrated into reinsurance underwriting capital," he said in the Aon Benfield Aggregate (ABA) report. The broker estimates that global reinsurer capital reached a record $505bn at 31 December, 2012. This is an increase of 11% ($50 billion) on a year previously. This calculation is a broad measure of capital available and includes both traditional and non-traditional forms of reinsurance capital. The firm's latest study found that capital reported by the ABA group of 31 leading reinsurers increased by 12%, or $33bn, to $313bn by the end of 2012. This was driven primarily by $29.5bn of net income and $15.9bn of unrealised capital gains. Dividends and share buybacks rose marginally to $16.1bn. Aon Benfield added that the level of ABA engagement with third party capital increased 'significantly' over the last 18 months. This has mainly manifested itself in sidecar sponsorship and the formation of in-house fund management operations. All this is good news for risk managers accessing the reinsurance market directly and should have a dampening affect on any attempts by insurers to push through primary rate increases as they benefit from the stable pricing environment. According to Guy Carpenter, rates at the 1 April renewal in Japan decreased moderately for most catastrophe excess of loss lines due to a year largely absent of major catastrophe losses. However, the losses from the Tohoku earthquake and the Thailand floods in 2011 still influenced the 2013 renewal by limiting downward pressure on prices. It noted that the Indian domestic treaty renewal was subject to an environment similar to that faced by other territories in the Asia Pacific region as softer market conditions saw reinsurance buyers increase their attachment points to save money or negotiate further in order to maintain a similar reinsurance spend against meaningful exposure growth. For the few but sizable US placements renewing at 1 April, traditional reinsurance pricing was down generally in the single digit range, said the broker. "Non-traditional capacity has impacted the market and is expected to continue to do so in the upcoming June renewals," it said. At the ABA group of reinsurers pre-tax profit more than doubled in 2012 to $35.7bn. This the highest level since the onset of the financial crisis. Aon Benfield reported that gross property and casualty (P&C) insurance and reinsurance premiums written by the ABA rose by 6% to $192bn, principally driven by higher pricing in loss-affected lines and territories, with a number of companies deploying new sidecar capacity for catastrophe business. The P&C combined ratio stood at 92.6%, down from 105.1% in 2011, representing an underwriting profit of $11.7bn. All but two constituents reported positive results. The contribution to the combined ratio from catastrophe losses totaled 7.5 percentage points ($11.9bn), down from 20.0 percentage points ($29.6 billion) in 2011. The benefit to the combined ratio from favourable development of prior year reserves was 4.3 percentage points ($6.8bn), down from 5.0 percentage points ($7.5bn) in 2011.

Influx of non-traditional reinsurance capacity changing marketplace say brokers

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