Insurers and reinsurers are reassessing their risk tolerance in the face of increasingly frequent and severe catastrophes, new types of risk, and rising interest rates. But a surge of alternative capital—such as hedge funds, sovereign wealth funds, pensions, and mutual funds—into the $560 billion reinsurance market could reshape how insurers approach capital management strategy. Partners Rajiv Dattani and Shannon Varney note that these investments are lowering the cost of capital for insurers and helping tamp down coverage rate increases after natural disasters.
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A horizontal bar chart illustrates the trend of decreasing rate-on-line in catastrophe reinsurance coverage following major events. The rate-on-line represents the cost to the insurer for reinsurance coverage. Events and their respective rate increases are listed chronologically: Hurricane Andrew, resulting in a 106% increase; the Sept 11, 2001, attacks, causing a 60% increase; Hurricane Katrina, resulting in a 76% increase; the 2017–18 Atlantic hurricane season, causing an 11% increase; and both Hurricane Ian and the COVID-19 pandemic, prompting a 29% upturn.
Footnote 1: Rate-on-line is calculated as the ratio of premium paid to potential loss recovery, indicating the insurer’s cost for reinsurance coverage.
Footnote 2: Rate changes are measured from the lowest to highest rates surrounding each major catastrophe.
Footnote 3: The 2017–18 Atlantic hurricane seasons include Hurricanes Harvey, Irma, and Maria in 2017, and Hurricanes Florence and Michael in 2018.
Footnote 4: The data for 2022, which include the impact of Hurricane Ian and the COVID-19 pandemic, is an estimation.
Source: Guy Carpenter, reinsurance coverage rates (1991, 1993, 1999, 2003, 2005, 2006, 2017, 2019, and 2022).
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To read the article, see “Alternative capital in property and casualty: A way forward,” May 30, 2023.