June 1 Renewals: Alternative Capital Keeps Reinsurance Pricing Low

The influx of alternative capital from the investment community is keeping reinsurance prices low with plenty of capacity available heading into the Atlantic Hurricane season, says reinsurance broker Guy Carpenter.

In its most recent briefing report, Guy Carpenter says higher yields are drawing investors to the alternative reinsurance market, which over the last 18 months has produced approximately $10 billion in new capital in the form of catastrophe bonds, sidecars and collateralized structures. The capital emanating from the alternative market has grown significantly over this period accounting for an estimated $45 billion, approximately 14 percent of global property limit.

This influx of capital is changing “the nature of the sector's capital structure as investors grow increasingly comfortable with supplying capacity,” the briefing says. The change is impacting reinsurance pricing for peak property catastrophe risk in the U.S., driving June 1 renewal rates downward and likely through the rest of this year.

Global Head of Business Intelligence at Guy Carpenter, David Flandro, says the changes are continuing unabated and new sources of capital continue to emerge, adding, “The reinsurance sector has exited the fairly consistent post-Katrina Florida property catastrophe pricing range.”

Lara Mowery, Global Head of Property Specialty at Guy Carpenter, says the alternative market is setting prices at rates no longer tied to the traditional markets, indicating a level of comfort they did not have previously. This is producing lower reinsurance rates “in the traditional market as it seeks to remain competitive.”

For the Florida market, George Carse, head of Tampa Office at Guy Carpenter, says the combination of excess capacity and no hurricanes hitting the state for seven consecutive years has influenced pricing. He says the market indicated at the beginning of 2013 that clients renewing business this year should wait for a later renewal period. That wait produced “flexibility in pricing and structure options from both traditional and alternative reinsurance providers, coupled with a divergence of pricing between Florida-specific catastrophe bond transactions and the traditional reinsurance market, resulted in more substantial price decreases on average than originally anticipated.”

He also notes that competition kept several Florida-only bonds off the market as traditional insurers stepped in to fill the need.

The direction of pricing in the future will all depend upon losses for the 2013 hurricane season, says Guy Carpenter. With elevated hurricane activity predicted once again, carries will be monitoring events closely. NOAA is calling for as many as 20 named storms this season with the potential of up to 11 hurricanes and between three to six becoming major hurricanes.