The influx of new capital into the reinsurance industry constitutes the largest change to the sector’s capital structure in recent memory. Over the past 24 months, approximately USD20 billion of new capital has entered the market through investments in insurance linked securities (ILS), funds and sidecars as well as the formation of hedge fund-related reinsurance companies and collateralized reinsurance vehicles.
The amount of limit placed utilizing ILS and collateralized products continues to grow and some markets are broadening the line of business and product focus.
Utilization of capital markets capacity in the first six months of 2014 saw a continuation of the growth trends seen in 2013. Revealing a widening of application, capital markets investors continue to be drawn to the (re)insurance space primarily due to the advantages it offers as a non-correlating asset class. Also, the recent availability of meaningful risk opportunities continues to drive investors to focus on the insurance-linked security space.
The performance of capital markets-based risk transfer capacity relative to traditional asset classes through different financial market cycles (including interest rate cycles) demonstrates the value of this asset class and its non-correlative basis. The figure below shows the cumulative return profile of 144A catastrophe bonds (as a proxy for all capital markets-based risk transfer capacity) versus various other capital market asset classes.
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