Non-traditional sources account for 14% of property capacity

The growing participation of non-traditional capacity sources have altered the face of the reinsurance market, according to Guy Carpenter vice-chairman David Priebe. Speaking yesterday at Guy Carpenter’s annual Monte Carlo press conference, Priebe said: “The reinsurance proposition has changed.”

He pointed out that non-traditional sources, such as catastrophe bonds, sidecars and industry loss warranties (ILWs), were providing $34bn of property reinsurance and retrocession capacity at the mid-point of 2012 according to estimates from Guy Carpenter’s capital markets arm GC Securities. This figure is 14% of the total industry’s $240bn capacity.

And the influence of non-traditional sources is still growing. GC Securities expects catastrophe bond issuance to exceed $6bn by year’s end, and that the total value of in-force catastrophe bonds to exceed $15bn – a new high.

In addition, the non-cat bond alternatives “are growing at a quick, quick pace” Priebe said, pointing out that sources such as sidecars, ILWs and collateralised reinsurance had accounted for $3.2bn of new capacity so far this year.

As such, Guy Carpenter now believes the traditional reinsurance and capital markets have converged.

Priebe said: “Large buyers now view the whole range of products from indemnity to index-based cat bonds, collateralised reinsurance programmes, capital markets sidecars, and traditional excess-of-loss and pro-rata treaties as part of their core reinsurance or retrocessional programme, not just the ad-hoc fillers that they were several years ago.”

The advent of collateralised reinsurance in particular has started to shift the focus away to an extent from the large, well-capitalised reinsurers, Priebe asserted. With the collateral guaranteeing that their policy will pay out in the event of a loss, buyers need to worry less about the size and strength of the reinsurance provider’s balance sheet and can diversify their sources of reinsurance,

“The world is changing,” Priebe said. “It used to be all about rated carriers and balance sheets.”

However, he added that traditional reinsurers are still forming the core of buyers’ programmes because of their desire for continuity and long-term commitments. He estimates that buyers will keep between 60% and 70% of their business with traditional players.

“A company’s exposures don’t go away following a loss,” Priebe said. “They need to continue to operate and manage their business, so they want to make sure they have access to continued capital and capacity following a loss.”