A report released by Guy Carpenter indicates that convergence capital— which now totals $45 billion, or 14 percent of the market— has pushed pricing in the capital markets to break away from levels set by the traditional reinsurance market. The phenomenon has been driving down overall pricing.
According to Guy Carpenter, the amount of excess capital in the market has helped mitigate the impact of catastrophe losses. Despite cat losses reaching $20 billion in the first half of 2013, US property per risk pricing has come under pressure and loss-free US property cat pricing has seen some of the largest individual program decreases of the year.
David Flandro, managing director and head of global business intelligence at Guy Carpenter, told Bermuda:Re that traditional Bermuda players have nothing to fear. He said: “The immediate, short-term effect of a capital influx is usually a decrease in pricing. This is a simple supply and demand dynamic and the 2013 midyear renewals have been no exception. Bermuda insurers to whom I have spoken are fully aware of this dynamic. Many are innovative, creative companies and it is no secret that Bermudians have themselves been at the forefront of deploying this new capacity through their own alternative vehicles.”
He continued: “About half of the convergence capital we’ve tracked since 2011 has come from what we would normally characterise as ‘traditional’ players.”
Flandro also put to bed any suggestion that the new capital is only in the cat space for the short term. He said: “Our operating assumption is that the new capital is here to stay. We think the growth of convergence capital has been extraordinary and do not expect this rate of growth to continue indefinitely. Nevertheless, the idea that the new capital will somehow ‘cut and run’ after the first big loss is incorrect. Capital providers fully expect losses and plan to remain even after a ‘mega-cat’. We think it best to assume the new capital is in for the long run and plan accordingly.”
According to Flandro: “I think the answer is to find new ways to serve clients in this dynamic environment through the profitable deployment of this capital.”
Guy Carpenter, convergence capital, ILS, reinsurance rates