The reinsurance industry has described the growth of alternative capital as a "highly disruptive" force, but owing to its relatively small share of the overall market it's fair to say that pricing in the sector is still driven by traditional sources of capacity, says Henry Kingham.
Kingham, a Divisional Director at reinsurance broker Willis Re, highlights that of the estimated $350 billion of global property cat capacity roughly 16%, or $55 billion, is contributed from alternative capital sources.
"This number is arguable given the opaque nature of business that reinsurers are ceding to sidecars," explains Kingham.
The $55 billion figure is somewhat lower than the $70 billion that was reported recently by Willis Capital Markets & Advisory (WCMA), however, the total estimate from Kingham refers to primary reinsurance associated capital, and therefore excludes retrocession and ILW transactions.
Adjusted to include total alternative reinsurance capital associated with property cat business, including sidecars and catastrophe bonds, Kingham's estimate grows to between $65 and $70 billion, so more in line with other approximations of insurance-linked securities (ILS) capital volume.
Irrespective of the volume of alternative reinsurance capital being $55 billion or $70 billion, the fact remains that its "market share of global property cat is still relatively small," explains Kingham, at roughly 16%, or 20% for the upper end of the range.
"Using this statistic we can assume that traditional markets are still driving pricing in property cat given their dominant market share, however, traditional capacity is using alternative capacity to help them achieve this," says Kingham.
Further evidence of traditional reinsurance capacity being the main driver of price declines in the global property cat industry, says Kingham, can be seen with the desire of traditional markets "to grow market share whilst at the same time use the ever-popular side-car form of retrocession," something that has been clear to see over the last two years.
Two subsectors of the ILS market that have witnessed heightened demand in recent times are the retrocession (including ILWs) and Florida markets, which have seen supply outstrip demand, contributing to the decline in pricing.
Kingham states that the growth of these two sectors has been notable over the last 12 months, at a time when absolute property cat capacity has been reasonably flat.
"The combined capacity of these two markets is now estimated at $27 billion and is heavily dominated by alternative capital," highlights Kingham, continuing to explain that according to Willis Re's analysis this represents a combined market share of more than 50%.
Furthermore, increased purchasing of $4 to $5 billion in Florida, and $1.5 billion of retro and the resulting demand increase, was "matched with limited extra supply from alternative capital," explains Kingham.
This resulted in, for example, Florida wind ILW pricing at $50 billion increasing by roughly 15% in mid-June, stressed Kingham.
Alternative reinsurance capital is continuing to grow its share of the overall reinsurance sector, albeit at a slower pace than witnessed in the early stages of last year. And, as it seeks to expand beyond the property cat arena into new risks and geographies, its impact could be more widely felt throughout the re/insurance landscape.
Despite traditional capacity remaining the main driver of pricing within the property cat markets, Kingham concludes "where alternative capital has a significant market share we can see substantially more pronounced effect of their actions on pricing."
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