MONTE CARLO, Monaco — Inflows of nontraditional capital into the reinsurance industry helped to push down rates at midyear property catastrophe renewals — notably in the United States — and likely will have a similar effect at Jan. 1 renewals, according to Guy Carpenter & Co. L.L.C.
And a major loss would not drive that new capital out of the industry, according to the brokerage, but rather could cause some investors to increase their appetite for reinsurance risk as others reduce their participation.
The influx of third-party, or “convergence,” capital had a direct influence on rates for reinsurance coverage at the midyear renewals, David Priebe, vice chairman of Guy Carpenter, said at a briefing Saturday during the Rendez-Vous de Septembre reinsurance meeting in Monte Carlo, Monaco.
This is likely to be a record year for catastrophe bonds, with issuance predicted to top $7 billion by year-end, according to Mr. Priebe.
Pension fund investors in particular have driven the boom in cat bonds, and while some may reduce their participation in the market when returns in other asset classes improve, most of these investors likely will continue to play a role in the market — which is good news for reinsurance buyers, said Mr. Priebe.
At the June 2013 renewals for property catastrophe business, particularly in Florida, the insurance-inked securities market for the first time offered rates that were comparable to — or lower than — the rates offered by traditional reinsurance markets, Mr. Priebe said.
This meant that rates fell by about 15% at the June Florida renewals, and loss-free U.S. property catastrophe business saw rate reductions of as much as 30% at the July renewals, he said.
Although this trend was less pronounced outside of the United States, rates in other areas of the world also were affected by the influx of new capital, Mr. Priebe noted.
And a side effect of the plentiful capacity for property catastrophe risk has been downward pressure on rates for other lines of business as reinsurers have sought to diversify, he said.
Both rate reductions and increased choice of products are good news for buyers, said Mr. Priebe. But comparison of the coverage offered by traditional and nontraditional markets is not simple, he said.
While some investors may reduce their participation in the reinsurance market in the event of a major loss — a marketwide loss in excess of $50 billion — or a rise in interest rates, most likely will remain in the industry to some extent for the long term, said Mr. Priebe.
He said that for pension fund investors in particular, the noncorrelation of insurance risk with other investment asset classes have made the industry especially attractive.
“The people investing in this class fully understand what they are getting into,” said Mr. Priebe. Investors are aware that they could face a total loss of their investment in the event of a large reinsured loss. But as long as that loss is within their expectations, it likely would not prompt investors to retreat, he said.
A “surprise” loss could cause those investors to rethink their pricing of products but probably not their participation in the reinsurance market, he said.
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