The cost of reinsurance against catastrophic property losses fell at the July 1 renewals, despite a rise in such losses during the first half of the year, according to Guy Carpenter.
The firm, a unit of Marsh & McLennan, said that a large influx of capital from third-party investors in the form of catastrophe bonds, sidecars and collateralized reinsurance activity, caused pricing in the capital markets to decouple, or beak away from levels set in the traditional reinsurance market for the first time. This, in turn, put downward pressure on the price of traditional reinsurance.
In a report published today, Guy Carpenter said so-called convergence capital now accounts for an estimated $45 billion, or approximately 14% of the total reinsurance market.
In the first six months of this year alone, $4.2 billion of property casualty catastrophe bonds were issued, and outstandings likely reaching an all-time high of around $16 billion, according to the report.
This additional capital helped mitigate the impact of catastrophe losses resulting from severe tornado activity in the U.S. and floods in parts of Europe, India and Canada during the second quarter of 2013. Catastrophe losses reached approximately $20 billion during the first six months of the year. That was above the average for the past 10 years..
“At July 1, we saw continued significant decreases in U.S. property catastrophe program pricing. Although the impact of convergence was less dramatic elsewhere, general downward pressure on rates was observed for property business in several other regions and across some casualty lines,” said David Flandro, global head of business intelligence at Guy Carpenter.
“Without further significant catastrophe losses in the remainder of 2013, we expect that this downward pricing trend will likely continue through the remainder of the year and into the January 1, 2014 renewals,” he said.
“For the third consecutive year, we’ve seen a significant shift in market conditions during the second half of the renewal season,” said Lara Mowery, global head of property specialty at Guy Carpenter. “This behavior is contrary to the market’s historical precedent, as the factors that typically impact the mid-year renewals are normally driven by those already present in January. As seen in this year’s July renewals, the excess capital in the market, and more importantly, the behavior of that capital, has encouraged a dramatic shift that triggered downward pricing in the traditional market in order to remain competitive.”