Traditional reinsurers hedging their bets: Guy Carpenter
Many traditional reinsurers are “hedging their bets” by forming their own capital markets divisions to attract, manage and utilise capital from third-party sources, according to a report by Guy Carpenter looking at catastrophe bond activity in the fourth quarter of 2013.
The report stated that 2013 was a record year for catastrophe bond issuance (as distinct from the broader ILS markets) with some $7.1 billion worth of new property and casualty catastrophe bonds issued.
The briefing, Catastrophe Bond Update: Fourth Quarter 2013, also found that in the fourth quarter of 2013, catastrophe bond issuance of $1.82 billion was minimally offset by the limited amount of catastrophe bond maturities of $360 million, resulting in a net change of risk capital outstanding of $1.46 billion.
As a result of the positive net change in risk capital outstanding, total risk capital outstanding at the end of 2013 reached an all-time high of $18.58 billion, an estimated 16 percent of global property catastrophe limit purchased annually.
According to the report, influence from direct capital markets' participation in reinsurance programmes, coupled with catastrophic insured losses well below historical averages in 2013, is putting significant pressure on global catastrophic reinsurance pricing. This, in turn, is prompting many reinsurers to move into the third party capital space themselves.
“Traditional players in particular are hedging their bets and creating their own capital markets decisions to attract, manage and utilise capital from third-party sources whether in the form of fund management, managed accounts or sidecars,” the report said. “This will allow reinsurers the opportunity to securitise the most capital-intensive parts of the business while providing valuable cost-efficient capacity on other business lines.”
Chi Hum, global head of distribution for ILS at GC Securities, added: “The growing influence of alternative markets capacity is pressuring traditional reinsurers' business model and challenging them to compete against a model with lower-cost of capital that continues to enter the reinsurance market.
“As the catastrophe bond market continues to mature, more new sponsors are looking to the alternative market space for meaningful capacity and we expect that this trend is likely to continue through 2014."
