Reinsurers will innovate their capital structures to turn headwinds from alternative capital sources into tailwinds, says Aon Benfield’s Bryon Ehrhart.
The great challenge and opportunity facing the reinsurance industry is not the $45 billion of alternative capital that has entered the industry in the last decade but it is in managing the value that can be created through the next $100 billion that will enter the reinsurance business over the next five years.
That is how Bryon Ehrhart, the chief strategy officer for Aon Benfield and chairman of its analytics and investment banking arms, sums up the dynamics of the reinsurance industry. “We estimate that there is $510 billion of capital in the industry right now and that some $100 billion of that—around 20 percent—will be refinanced as a result of this alternative capacity in the next five years,” he said.
To incorporate the additional $100 billion of alternative capital flows, reinsurers will engage in three broad categories of transactions with investors: insurance-linked securities (ILS or cat bonds) to lower the cost of underwriting capital supporting peak tail risks; sidecars to lower the cost of underwriting capital across the risk spectrum; and the formation of asset management divisions that will allow reinsurers the opportunity to accept asset management mandates from investors.
Reinsurance, Bryon Ehrhart, Aon Benfield, Rendez-Vous