The influx of third-party capital into the reinsurance market may displace up to $40 billion of traditional equity capital, which could either be returned to shareholders or redeployed elsewhere in the re/insurance market, according to Willis Re, the reinsurance arm of Willis Group Holdings plc, the global risk advisor, insurance and reinsurance broker.
The current trajectory of growth in third party capital suggests it could account for up to 30 percent of the global property catastrophe reinsurance market within a few years, representing approximately $100 billion of capacity, according to panellists at the Willis Re Monte Carlo Rendezvous Press Conference.
John Cavanagh, CEO of Willis Re, commented: “Discussions so far have centred on the effect third party capital is having on rates and the competition it is producing in the property catastrophe reinsurance market. A future influx of $100 billion would, however, have a number of profound consequences. As third party capital enters the property cat reinsurance market, it is going to crowd out conventional equity capital. That equity capital has to go somewhere.”
Cavanagh added that if $100 billion of third party capital enters the reinsurance market, then even allowing for significant returns of capital to shareholders, there could be as much as $20 billion excess equity capital to be deployed.
He continued: “You could think of this as being the equivalent of 10 well capitalised start-up companies, and the effect on the market place would be profound. If capital is redeployed, much of it could go into direct insurance businesses. Many of the hybrid specialty reinsurers are already implicitly going down this path.”
The influx of third party capital, coupled with changes to reinsurance buying patterns and regulatory complexity is leading to growing complexity in the reinsurance market.
Cavanagh said: “Solid analytical advice and market knowledge through intermediation is needed now more than ever.”
Also speaking at the event, Tony Ursano, CEO of Willis Capital Markets & Advisory, said that he expects a very active capital markets and mergers and acquisitions (M&A) environment for the remainder of 2013 and going into 2014.
Ursano said: “On the capital markets side, we expect a very active cat bond calendar, including new and renewal sidecar financings, additional activity around new insurance-linked securities fund formations and strategic partnerships, as well as more new hedge fund sponsored reinsurers.
“We expect activity in the insurance M&A arena to be robust, driven by a number of factors. These include increased CEO and board level confidence derived from higher public valuations, a continued focus on growth, scale and diversification, private equity involvement as both buyers and sellers, and the gradual consolidation of the reinsurance sector driven in part by third party capital involvement.”