Aon Benfield, the global reinsurance intermediary and capital advisor of Aon plc, today releases the September 2013 edition of its flagship Reinsurance Market Outlook report, which provides a comprehensive analysis of the key variables affecting buyers of reinsurance as they approach the 1/1 renewals.
The report, entitled ‘Post Convergence: The Next USD100 Billion’, reveals how insurers and reinsurers will benefit from the next, and much more transformative, USD100 billion of alternative capital that will enter the reinsurance business over the next five years. The value proposition of reinsurance will improve as the cost of underwriting capital is reduced for reinsurers. The post-convergence market brings unlevered collateralized products that are more accretive to insurers than traditional reinsurance for peak risks.
Reinsurers in the post-convergence market will innovate their capital structures to incorporate the additional USD100 billion of alternative capital flows. Reinsurers will engage in three broad categories of transactions with investors:
a) insurance-linked securities (ILS or cat bonds) to lower the cost of underwriting capital supporting peak tail risks;
b) sidecars to lower the cost of underwriting capital across the portfolio risk spectrum, and
c) formation of asset management divisions that will allow reinsurers the opportunity to accept asset management mandates from investors.
Bryon Ehrhart, Chairman of Aon Benfield Analytics, said: “The benefits of this new capital will begin to extend beyond property catastrophe and mortality risks that are common features of the current ILS market and extend into many other reinsurance lines where loss frequency and severity are more predictable.”
Commenting on the upcoming renewal season, he commented: “The January 1 renewal market for our clients will benefit materially from an excess of traditional reinsurance capacity and new alternative capital flows over light demand growth for reinsurance capacity. Our clients should expect to benefit from a competitive market even if a moderate hurricane season should develop.”