31 October 2013ILS

Alternative capital set to test reinsurers’ resolve

The influx of pension fund interest in property catastrophe risk will test the resolve of reinsurers as they head towards January 1 renewals, with conditions further exacerbated by meagre investment returns.

According to statistics from Munich Re, alternative capital in the market is set to rise to $75 billion by 2016, or 25 percent of total cat capacity. Currently, convergence capital accounts for 17 percent or $44 billion of cat capacity, but it is evident that capital continues to find its way into the sector. Aon Benfield said that it believes a further $100 billion of alternative capital will find its way into the market in the coming five years. As Paul Schultz, CEO of Aon Benfield Securities explained, “in order to deploy $100 billion, we are going to have to expand the availability of the product beyond cat.”

While pension fund interest has traditionally been in US peak peril risk, which has traditionally enjoyed high margins, the influx of convergence capital is now being felt directly and indirectly beyond peak peril risk.

Pressure from pension fund capital in the US cat market has had a knock-on effect elsewhere, as reinsurers have sought to put their capital to use in other places. Despite losses from floods in Germany, reinsurance rates in Europe have been largely flat, in a large part due to capital flowing into Europe from the US.

Commenting on this development, Schultz said: “It is inevitable that we are going to see capital flow into other types of insurance and reinsurance risks, namely liability and casualty, in addition to cat.”