Reinsurers face threat from third party capital
Global reinsurers face further competition from third party capital according to AM Best’s latest report.
The report titled The Capital Challenge: Reinsurance Capacity Overshadows Market, says that while reinsurers have so far managed to gain reasonable returns on capital while sustaining organic growth in capacity, they face further competition.
“Another hurdle has materialised on the horizon in the form of third-party capital,” says AM Best. “With excess capacity prevalent among the traditional reinsurers, pricing in the market is already very competitive. This is most evident in longer tail casualty classes, leaving only shorter tail specialty and property classes up for the chase.
“While the capital markets historically have provided capacity out on the tail for property/catastrophe risk, generally in the form of catastrophe bonds, industry loss warranties and other collateralised structures, it now appears investors, asset managers and bankers are showing more interest in the lower layers of catastrophe programs, as well as in other specialty and casualty classes.”
The report says that various reinsurance brokers have reported that as much as $45 billion of additional capacity has entered the reinsurance market in recent years, representing 14 percent of the current global property limit.
“Reinsurers feeling the competitive pressure from capital market participants increasingly have sought to partner with this capacity rather than fight it,” says the report.
“Hedge funds, pension funds, endowments and trusts looking for a bigger slice of the pie are lured by the relatively favorable returns, float and uncorrelated risk that the reinsurance business offers. However, industry headlines may be aggrandising the true reinsurance appetite of this third-party capital. Front-line sources indicate that capital is entering methodically and precisely, not just rushing in blindly.”
