The roller coaster ride engendered by the entry of large amounts of alternative capital into the reinsurance market – originally seen as a threat – has turned out to be a major factor in strengthening the capital available to reinsurers to underwrite major risks, according to Aon Benfield’s recently issued January 2015 “Reinsurance Market Outlook.”
According to the report, “Executive Summary—Reinsurance Value Proposition Improves to New Generational Highs,” the quality of the financial security for the reinsurance market has never been higher. “Reinsurers like their insurer counterparts take less risk per unit of capital than they ever have. The price of traditional reinsurance, particularly property catastrophe reinsurance has fallen in response to disruptive alternative capital that has grown in influence to become a price maker rather than a price taker. Today it is likely that the value proposition of reinsurance – the combination of quality and price – has never been higher,” the report says.
The report traces the “15 year journey” that traditional reinsurers have been going through as having finally come to an end. The journey featured stages of “alternative capital’s insignificance, competition and finally disruption.” The report, however, notes that “as disruption reigned over the last three renewal cycles, leading traditional reinsurers made material progress to incorporate the value of alternative capital – lower cost underwriting capital – into their client value propositions.”
In fact reinsurers’ capital grew to $575 billion including $62 billion of deployed alternative capacity – both records and, the report says, the growth rates in reinsurance capital and alternative capital deployed were 6 and 25 percent, respectively.
Alternative capital representing only 12 percent of traditional reinsurer capital is substantially deployed in property catastrophe risks, according to Aon Benfield. When $62 billion of alternative capital is compared to capital traditional reinsurers may be willing to risk upon the occurrence of a 250 year event or series of events, “its influence is far more substantial – 40 to 50 percent, hence, disruptive in the property catastrophe sector of the reinsurance market,” the report says.
Aon Benfield contends that fears over the disruptive impact of this capital on other sectors of the reinsurance market are “overblown.” It predicts that alternative capital’s next “most likely disruptive move” will be in property insurance and business interruption rather than casualty reinsurance.
Aon Benfield concludes that demand for property catastrophe reinsurance grew at a slightly higher rate in 2014 and at January 2015 than in prior periods; however, the demand growth rate was still less than the growth in catastrophe reinsurance supply.
“Growth in demand for multiple year programs, aggregates, underlying and overlying capacity were most notable. Continued material progress has been made in improving terms and conditions for cedents. Growth in demand for casualty reinsurance programs has also improved with highly customized structures, terms and conditions – partner selection is highly emphasized by reinsurers and cedents,” the report says,.
Aon Benfield said it expects that these trends will continue into the April, June and July 2015 renewal cycles. “Insurers have the widest selection high quality offers of accretive underwriting capital choices we can recall,” the brokerage said. “Growth and consolidation plans for leading insurers have found complementary support from partners in the reinsurance market – more to come.”
Source: Aon Benfield
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