MONTE CARLO, Monaco — Capacity provided by third-party capital investors is here to stay in the reinsurance industry and could have positive long-term effects for buyers.

There could be less convergence capital invested in the market if interest rates increase, leading to higher returns in other asset classes, or if there is a very large reinsurance loss event. However, it's unlikely investors would withdraw that capital altogether, experts say.

Experts gathered at the Rendez-Vous de Septembre reinsurance meeting in Monte Carlo, Monaco, this month, said that while such capital has helped to reduce rates for traditional reinsurance and gives buyers added choice, it remains to be seen whether and how that capital will be deployed into business lines other than property catastrophe coverage.

The inflow of new capital will help to reduce the cyclical volatility formerly inherent in the market, said Dominic Christian, co-CEO of Aon Benfield, the reinsurance brokerage arm of Aon P.L.C.

The industry is undergoing a gradual but fundamental transformation with the influx of nontraditional capacity, said Tony Ursano, CEO of Willis Capital Markets & Advisory in New York.

“The asset class has been legitimized,” he said, and more capital is likely to flow into the industry. Willis predicts that by 2020, $150 billion in capital could be allocated to the reinsurance class, especially as new products are developed, he said.

“We are now in a post-convergence market,” said Bryon Ehrhart, chairman of Aon Benfield Analytics.

Rather than being a competitive threat to reinsurers, that capital will become part of traditional reinsurers' business models, he predicted, as they sponsor catastrophe bonds and sidecars and start to explore ways to include casualty risks in such mechanisms.

%%BREAK%%

“The growth of convergence capital has been steady and sustained and we expect that to continue,” said David Priebe, a vice chairman at reinsurance broker Guy Carpenter & Co. L.L.C.

The growth in the catastrophe bond area has been particularly significant and Guy Carpenter forecasts that cat bond issuance will exceed $7 billion — a record level — this year.

“When the ducks are quacking, feed the ducks,” said Willis' Mr. Ursano, who noted that there is high demand for catastrophe bonds currently.

While some of this capital may leave the market when returns elsewhere increase, investors have gained confidence in reinsurance as an asset class, and investment from pension funds and others is sustainable, Mr. Priebe said.

“That is good news for reinsurance buyers,” he said.

Besides the effect such capital has had on pushing down rates offered by traditional reinsurers, the new capacity gives reinsurance buyers added choice, Mr. Priebe said.

He said, however, that the coverage offered by convergence capital is not identical to traditional treaty reinsurance products, so buyers need to take advice from their brokers.

Currently, convergence capital largely is concentrated on a single peril — U.S. property catastrophe risk — and it will be interesting to see where nontraditional capital providers “go next,” said Matthew Paskin, executive director of group underwriting at Hamilton, Bermuda-based Catlin Group Ltd.

Nontraditional reinsurance capital providers likely will align themselves with companies with traditional reinsurance expertise to offer different types of coverage, Mr. Paskin said.

%%BREAK%%

Capital has to be deployed, which likely will necessitate the design of products in business lines other than property catastrophe, said Daniel W. Gerber, a partner at law firm Goldberg Segalla L.L.P. in New York.

Additionally, there is a great deal of research and development taking place to find lines of business aside from property catastrophe that might be suited for investment by nontraditional capital providers, Willis' Mr. Ursano said.

There is interest in classes such as auto reinsurance, directors and officers liability, and workers compensation coverage, among others.