Investors have flooded the catastrophe reinsurance market with $35 billion in new capital. Bill Keogh weighs up the pros and cons.
Until recently, the reinsurance business operated virtually unchanged for centuries. But in the space of a few short years, the reinsurance market has been stood on its head. For this new state of affairs we can thank a massive influx of capital from a new class of investors seeking high yield in a low interest environment coupled with the attraction of risk uncorrelated to other investments.
While we have seen new capital enter the market at previous inflection points, the volume of new capital is significantly higher. According to Intelligent Insurer, investors have flooded the catastrophe reinsurance market with $35 billion in new capital, a 30 percent increase over last year. Alternative capital already accounts for about 20 percent of the market and is expected to top 30 percent by the end of this year.
Hedge funds are starting their own reinsurance companies, entering into joint ventures with reinsurers, investing in sidecars, catastrophe bonds and collateralised reinsurance products.