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Member, Beacon International Group, Ltd.
Ample capacity is precluding a hard reinsurance market, according to a report released Monday by Willis Re, the reinsurance arm of London-based Willis Group Holdings P.L.C.
The report, “Looks Can Be Deceiving,” finds that available capacity effectively prevents the rate increases seen in certain catastrophe-prone geographies and lines of business from applying to all buyers.
“The reinsurance market is stable and orderly, but the reality is that it is not hardening,” Peter Hearn, chairman of Willis Re, said in a statement. “In fact, some buyers with loss-free programs, even in areas of peak exposure, have managed to obtain risk-adjusted rate reductions at the June 1 and July 1 renewals.”
The report notes that a significant part of the capital is entering the reinsurance market through nontraditional vehicles such as catastrophe bonds and sidecars.
“While the pace of mergers and acquisitions among traditional reinsurers continues, there has been a marked increase in the flow of capital into nontraditional vehicles,” the report said. “Hedge fund investors are increasingly being joined by longer-term investors, in particular pension funds, who are attracted to the noncorrelated returns available in reinsurance risk.”
But the report notes that this new capital is potentially volatile.
“While the influx of capital is clearly welcomed by buyers and has helped stabilize rate increases, underlying concerns remain over the durability of highly fungible capital,” the report states. “Much of it is untested and conditioned by investor reaction to a major catastrophe event.”