REINSURANCE CAPACITY GROWTH TO OUTPACE DEMAND IN 2013

According to Reinsurance Market Outlook published by AONBenfield in January 2013, global reinsurance capacity growth is expected to outpace its demand.

The summary of the report is presented below:

Reinsurance capital reached USD500 billion in 2012. The lack of significant reinsured losses from catastrophes in 2012 was a reasonable departure from the building view of a "new normal" higher level of global catastrophes. Substantially lighter global insured catastrophe losses have restored confidence in both insurers and reinsurers. The new record level of reinsurer capital however, creates what is likely the widest gap between reinsurance supply and demand. Reinsurance supply, measured by capital, grew more than ten percent while reinsurance demand, measured by capacity placed was stable in catastrophe lines and declined in nearly all non-catastrophe lines.

 We expect much further work in the transition toward reinsurers managing more non-equity sources of capital to improve the value proposition to reinsurance buyers during 2013. Larger buyers of reinsurance are already accessing less expensive non-equity based capital to lower their weighted average cost of underwriting capital. This rotation will lead to more reinsurer share repurchases, consolidations and the creation of more reinsurer managed funds businesses. In five years, more than half of the top reinsurers will manage insurance-linked funds for investors.

Reinsurers will also begin to manage their own tail risk with better matched sources of non-proportional retrocession capacity from investors that will continue to find the diversification dynamics of the industry attractive for the foreseeable economic future. Insurers have benefited and will continue to benefit from these dynamics.

 Demand for insurance continues to grow globally but at a slow rate as mature economies continue to show low growth as excesses from the most recent growth years are worked-off and refinanced. There is hope for improved demand growth for insurance and reinsurance.

 While rating agency models and the expected solvency requirements now have insurers and reinsurers taking less risk per unit of capital than they ever have, if similar stress tests are eventually applied to corporate insureds the value of insurance would be more tangible. Lessons from recent events could also drive new demand. These experiences show that insured properties are repaired faster, cost governments less, don't threaten lenders' capital and provide communities continuity. The fact that such considerable efforts globally could be devoted to banking reforms without considering simple measures as insuring mortgaged properties is surprising (e.g. U.S. banks still don't require earthquake insurance on mortgaged properties).

 Economic realities for many governments that finance these risks today point to less premium subsidization and more privatization over time. The reinsurance market is well positioned to meet the additional capacity needs of private insurers should insurance utilization grow. Reinsurer capital has grown to levels far beyond what many governments considered possible when many of the existing government schemes were crafted.

 

While the aforementioned dynamics are in play, we believe global reinsurance supply will continue to be in excess of reinsurance demand for the next important renewal dates in April, June and July 2013. Barring very significant events, we expect our clients to find an orderly and competitive market for their risk transfer needs.