Indirect impact of alternative capital will reach the entire market
The influx of alternative capital is continuing to cause the largest change to the re/insurance industry’s capital structure in years.
That is the opinion of Andrew Marcell, CEO, US Operations, Guy Carpenter who said that the indirect impact of this capital will span the entire reinsurance sector.
Speaking to PCI Today, Marcell said that over the past 24 months approximately $20 billion of new capital has entered the market through investments in insurance-linked securities (ILS) funds and sidecars, as well as formation of hedge fund-related reinsurance companies and collateralised reinsurance vehicles, much of which is “patient money” that will persist through loss cycles.
“The direct impact of this new capital has primarily been focused in areas of the property catastrophe market perceived as high margin: retrocession, Florida, the residual market, and national programmes,” he said.
“However, the indirect impact spans the entire reinsurance market as reinsurers are using alternative capital to lower their cost of capital in addition to looking to replace lost property catastrophe premiums with other lines of business, most notably casualty.
“Furthermore, alternative capital sources are increasingly looking at lines of business outside of property catastrophe, as evidenced by the formation of casualty-focused ‘alternative’ reinsurers, as well as primary insurance opportunities.”
Echoing the view of many others in the industry, Marcell said that if the capital is used in innovative ways, it can produce profitable growth opportunities.
“We have invested in new solutions and customised programmes based on our understanding of new capital sources and each client’s strategic, financial, regulatory and operational objectives,” he said.
Marcell also spoke of the main trends he believes are currently influencing the US reinsurance market: innovation in products and coverage and consolidation in purchasing.
“As the reinsurance market has become more competitive, this has created opportunities for clients to optimise risk transfer solutions that meet their unique needs, and we will continue to see new and innovative approaches to reinsurance in the next 12 months,” he said.
“Also, clients continue to evaluate the effectiveness of their reinsurance purchasing to determine whether there are more cost-effective and efficient means to reinsure risk. In many cases this may include consolidation in purchasing within the property or casualty lines, and perhaps on a multi-line basis.”
Marcell said that he expected other topics such as reinsurance pricing, emerging lines such as cyber and growth opportunities to be key talking points at the PCI annual meeting.
