Mid-year reports issued by the largest brokers over the past two weeks show that hedge funds, sidecars and catastrophe bonds acted as a spoiler in the traditional reinsurance market’s hopes for a hardening market.
And although traditional reinsurers often back or structure these alternatives, the so-called “new capital” is not entirely trusted by the industry. “While the influx of capital is clearly welcomed by buyers and has helped stabilize rate increases, underlying concerns remain over the durability of highly fungible capital,” broker Willis said in its report.
Reports issued by Willis, Guy Carpenter and Aon Benfield say that the global reinsurance industry remains flush with capacity, although how much remains under debate.
In its mid-year “Reinsurance Market Outlook” Aon Benfield states that reinsurance industry’s capacity — as measured by outstanding capital — was at a record high $470 billion at the end of the first quarter and continues to grow.
Guy Carpenter’s mid year renewal report titled “Plentiful Capacity Sets Stage for June 1 Renewals” pegged reinsurer’s global capital at “$15 billion in excess of historical trends, given risks assumed,” although it does not give an estimated total capacity figure.
Willis’ “1st View” report eschews any aggregated number, but describes several lines of business and regions as either “adequate” or “plentiful.”
All that money has thwarted reinsurers’ hope for higher prices, especially the “hard market” hopes formed following the 2011 catastrophes. “The reinsurance sector continues to function normally and, in the absence of a significant cat loss burden, the improving capital position is likely to contain any attempt at price increases throughout the year,” Guy Carpenter said in its report.
One thing reinsurers seem to agree on — according to the reports – is frustration that a flood of new capital into the industry during a relatively light loss year is muting their hopes for hard market prices.
New hedge fund entrants — like SAC Re — along with new catastrophe bond and reinsurance sidecars like RenaissanceRe’s Timicuan Reinsurance have acted as a spoiler for many traditional catastrophe underwriters looking for price hikes and event institutional investors looking to invest, according to Willis.
Willis argues that while new capital is welcomed by catastrophe reinsurance buyers by stabilizing rate increases, reinsurers are not as thrilled. “ Much of it is untested and conditioned by investor reaction to a major catastrophe event(s),” Willis said in its report. “ Potential volatility is heightened by single source investors versus funds or sidecars comprised of multiple investors.”
The new capital is also forcing investors away from traditional reinsurers, which are already trading below book value, Willis argues. “It is clear that the damping impact on rates due to the influx of new capital is frustrating for existing reinsurers who are battling concerns over falling investment income and dwindling reserve releases.”
Aon Benfield argues in its report — issued Tuesday — that much of the new capacity was “simply not necessary” and seemed to thwart even marginal prices increases , especially in loss affected regions. That, in turn, forced traditional reinsurers step into markets by rewarding insurers that grew their catastrophe book “with better risk adjusted pricing” rather than forcing cedents that reduce exposure.
If traditional reinsurers continue to underprice or expand risk simply in order to compete with new capital, the outcome will not be pretty, Aon said.
“This trend weakens the value proposition of reinsurance, destroys demand and reduces the credibility of the reinsurance underwriting process,” the report chided.
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