Option sources of reinsurance such as collateralized reinsurance, catastrophe bonds and ILW contracts had been not thought of a main threat to the standard reinsurance marketplace in the early days of their improvement. But right now, it is clear that these new types of capacity are a force to be reckoned with.
This is most clearly demonstrated by the competitors for Home Catastrophe reinsurance renewals in June and July 2013. This is the time of year when most of the Florida and Gulf Coast catastrophe applications are renewed. These are also the applications that create a substantial return for reinsurers due to the fact of their higher probability of loss from hurricanes.
Development of the Option Reinsurance Marketplace Twenty years ago, these option reinsurance items had been just a gleam in the eyes of institutional investors and hedge fund managers. By 2012, this marketplace had grown to virtually $40 Billion of capacity most marketplace observers say that halfway by means of 2013, the marketplace has now exceeded $45 Billion.
Effects on Marketplace Pricing Traditionally, house catastrophe reinsurance underwriters have counted on the wealthy prices-on-line of the June and July renewals to fill their premium coffers for the year. But now we are in early July 2013, and it is clear that there has been a sea alter in marketplace dynamics.
All through May perhaps and June, reinsurance brokers and their customers saw substantial enhanced capacity offerings at quite competitive rates from these option reinsurance providers as these markets competed for marketplace share. The standard reinsurance underwriters, not be outmaneuvered by these stronger competitors, responded in type.
The finish outcome saw customers providing firm orders at rates up to 20% under expiring on a danger-adjusted basis, and getting complete placements at these terms with ease.
What Does the Future Hold? There is a lot of debate amongst market insiders as to the lengthy-term effects of this new capacity supply. Some of the options becoming discussed:
- Will this new capacity have the stomach to withstand the losses from a main hurricane in Florida or the Gulf Coast? A lot of traditionalists are hoping the hedge funds and private equity funds will head for the hills post-loss and lick their wounds. Other folks think the fund managers will recognize the profit possible in a post-loss situation and double down.
- How a great deal larger can the option reinsurance marketplace get? The barriers to entry and exit of the catastrophe reinsurance marketplace are at an all time low. Some observers calculate the option reinsurance capacity now represents virtually 15% of total worldwide catastrophe capacity. Some estimate that this capacity could develop to 50% of worldwide capacity, and possibly even far more.
- Does this new capacity signify the finish of the reinsurance pricing/capacity cycles as we know it? Previous marketplace cycles have been flatter due to the influx of new reinsurance capacity following each current main disaster.
- The reinsurance marketplace has turn out to be far more and far more commoditized some specialists predict we might see catastrophe reinsurance traded on electronic exchanges just like equities or commodities. There is no doubt that the private partnership among a cedant and his reinsurer is no longer as critical as it after was.
The answers to these inquiries will turn out to be apparent as this trend plays itself out. I never know about you, but I am seeking forward to seeing what takes place subsequent.