The April 1, 2014 and June 1, 2014 renewals indicate that competition from the capital markets continues to play a major role in the abundance of reinsurance capacity that is placing pressure on pricing. Here we review Guy Carpenter analyses examining the impact of the alternative markets on traditional reinsurers and how reinsurance carriers are expected to face that challenge through the year.
Catastrophe Bond Outlook for 2014: The growing influence of alternative markets capacity is pressuring traditional reinsurers’ business model and challenging them to compete against a model with lower-cost of capital that continues to enter the reinsurance market. Most reinsurance companies have responded to the challenge by leveraging their incumbent status on reinsurance programs, offering similar or better terms and similar or reduced pricing. Particularly, traditional players are emphasizing their ability to efficiently provide reinstatements, which are seen by many as a critical part of core reinsurance programs, particularly for working reinsurance layers. Traditional players are also hedging their bets and creating their own capital markets divisions to attract, manage and utilize capital from third-party sources whether in the form of fund management, managed accounts or sidecars. This will allow reinsurers the opportunity to securitize the most capital-intensive parts of the business while providing valuable cost-efficient capacity in other business lines.
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Catastrophe Bond Update, Fourth Quarter 2013: Influence from direct capital markets’ participation in reinsurance programs, coupled with catastrophic insured losses well below historical averages in 2013, put significant pressure on global catastrophic reinsurance pricing. As a result of significantly reduced pricing (relative to recent years), approximately USD7.1 billion worth of new property/casualty (P&C) catastrophe bonds were issued in 2013 - the second largest record year for P&C issuance. The year included seven new sponsors - American Coastal, American Modern, AXIS Capital, the Metropolitan Transportation Authority (MTA), QBE, Renaissance Re and the Turkish Catastrophe Insurance Pool - who collectively secured USD1.46 billion of catastrophe bond capacity. In addition to new sponsors, another prevalent change in the market was the increasing use and acceptance of indemnity-based triggers. Given that spreads have tightened between indemnity and other trigger types, sponsors were inclined to take advantage of investors’ openness to indemnity triggers to reduce coverage basis risk without a material increase in pricing relative to non-indemnity trigger pricing.
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