9 September 2013 News

Industry arrives at a new age of capital

The continuing influx of new capital into the market has been the biggest issue in the sector this year and will continue to be a big talking point during conference season.

That was the view of Alex Moczarski, president and chief executive officer of Guy Carpenter speaking at a briefing panel on Saturday at the Hotel de Paris, Monte Carlo.

He stated that a record amount of new capital entered the industry and had a clear and direct effect on market conditions.

“This tipping point was reached when pricing at the Florida renewal in June was directly affected by cat bond pricing for the first time,” he said.

David Priebe, vice chairman of Guy Carpenter, added that the developments are in line with predictions made by the company a year ago.

“This time last year we said the capital markets had converged,” he said. “We said the reinsurance market had come of age – or rather arrived at a new age in which the old distinction of traditional and non-traditional capital is obsolete. The experience of the past few months has vindicated that claim.”

He agreed that the influx of new capital had a direct and significant impact of the pricing of catastrophe insurance at the 2013 mid-year renewals.

“The establishment of Syndicate 2357 at Lloyd’s using Nephila Capital to write collateralised reinsurance and other non-traditional products epitomised the convergence of the old with the new,” he said.

According to Priebe, much of the capital has come from stable, institutional money attracted by higher returns and lower correlation.

“Institutional investors are gaining confidence in reinsurance as an asset class and providing they do not suffer a material loss that’s well beyond the model probabilities they will continue to support this class or even increase allocations after a large catastrophic event,” he said.

He also added that the private sector and capital markets are increasingly willing to take on risks covered currently by governments as improvements in modelling and analytics progress. He said: “Governments are looking for a way to move these risks off of their balance sheets. This is an important question for the industry to tackle.”

Priebe cited a catastrophe bond put together by Guy Carpenter and Marsh & McLennan on the behalf of the Mass Transit Authority (MTA) as a prime example of how the capital markets can take on risk from struggling government programmes. The cat bond, placed this year, protects against storm surge.

Priebe said: “Flood risk in particular is both an economic and a political issue that is very significant in virtually every country in the world. Many of those local governments are trying to determine how best to manage that risk. Given existing constraints, there is a desire to transfer that risk.”

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