We strongly believe that growth should not come from less-diligent underwriting (such as expanding protection to include risks that are hard to quantify and may contribute significantly to the likelihood of losses) or ventures into new products that do not match investors’ investment horizons or liquidity needs (e.g., casualty or longevity risks) just to put their assets to use. However, we see scope for the market to grow through an increase in take-up rates in the direct insurance markets. This in turn will lead to higher demand for reinsurance in catastrophe-prone areas. Cat bonds can also help governments reduce their exposure to disaster funding for these areas. We welcome governments using cat bonds to provide protection for countries that are exposed to natural catastrophes, such as Turkey, Mexico, and most recently the Caribbean Catastrophe Risk Insurance Facility. Properly structured joint ventures between strong underwriters and alternative capital providers such as hedge funds could provide further growth opportunities.
We expect to see more European wind storm deals come to market toward the later part of this year. The current predictions are for hurricane activity to be less than average. So far the alternative market has not been tested by a major catastrophe. How this alternative capital will react depends on whether event-based losses occur as expected (i.e., no significant unmodeled losses or model errors), the available yields in other asset classes, and the balance between short-term opportunistic investors (who are looking for extra yield and could exit the market if there are more-profitable alternatives) and longer-term players such as pension funds (who are looking to optimize their portfolios) affected by the losses. If the balance leans toward long-term players, we believe they could easily absorb a full-limit loss within their investment tolerance because they are only investing a small portion of their funds in this sector. Because rates would likely harden a bit after a major catastrophe (although we don’t expect such price increases to be as drastic as in the past), even one event could draw more capital into this sector.
Competition Puts Pressure On Pricing With such a large amount of alternative capital coming into the reinsurance market, we have been observing not only competition between the traditional reinsurance market
Global Reinsurance Highlights 2014
Chart 2: Estimated Size Of Global Alternative Capital Market That Is Focusing On Nat Cat Versus Cat Bond Spread
(Bil. $)
10 20 30 40 50 60
0
2005 2006 2007 2008 2009 2010 2011 Source: Swiss Re Investor Day presentation, July 3, 2014.
© Standard & Poor's 2014. 2012 2013 2014 ILS Collateralized reinsurance, sidecar, ILW
Chart 3: ILS Pricing Average weighted multiple to expected loss (%)
10 12
0 2 4 6 8
2009 2010 © Standard & Poor's 2014. 2011 2012 2013 2014 Average weighted risk spread Average weighted net expected return
Chart 4: Rated Versus Total Issuance (Mil. $)
1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000
0 2009 © Standard & Poor's 2014. 2010 2011 2012 2013 2014 to date Standard & Poor's rated issuance Unrated issuance
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