The sector has seen robust catastrophe bond, structured ILW s and collateralized reinsurance activity throughout the last 18 months. In total, around USD10 billion of new capital has entered the global market in these various forms over this period. This segment of the reinsurance market now accounts for an estimated USD45 billion of capacity, approximately 14 percent of global property catastrophe limit purchased, and the penetration of this capacity is growing.
Guy Carpenter continually monitors the breakdown of convergence capacity in the insurance-linked securities (ILS) market. Outstanding catastrophe bonds account for more than a third of this capacity (at USD16 billion), though the greatest rate of growth is being seen in collateralized reinsurance (currently USD15 billion).
The capital supporting convergence capacity is increasingly stable institutional money that has made a long-term commitment to the reinsurance market.
Although some allocations to the sector may exit once investment returns in other comparable asset classes pick up, the commitment to the sector from such a broad range of institutional investors suggests this is a permanent alternative asset strategy allocation. This is a positive development for reinsurance buyers.
Institutional investors are gaining confidence in the asset class and, providing they do not experience material surprises significantly outside the range of modeled expected loss probabilities from the risks they are assuming, they will continue to support, or even increase, their allocations to the sector following a large catastrophe event.
Pension funds have been a major contributor to the growth in new capital. Their focus on relatively remote peak peril catastrophe risk has contributed to the boom in the catastrophe bond market during 2013, with issuance reaching USD4.8 billion in the first seven months (see Figure F-2). Risk capital outstanding also reached an all-time high of around USD16.6 billion during the same period. Given the strong demand that is anticipated for the remainder of the year, GC Securities expects 2013 catastrophe bond issuance to approach or exceed the record amount of USD7 billion recorded in 2007.
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