Dear friend,
Well, interest rates are still simmering at very low temperatures, and as we approach the end of the US Atlantic hurricane season it looks like the market has once again escaped the impact of a major storm. Incredible, really. Sandy aside, that's six seasons in a row without a major hurricane in or around the Gulf of Mexico - and no one would have predicted that when Gustav and Ike pummeled the area in 2008.
What this means is that as we approach the end of the year capital levels remain buoyant, especially on the non-life side of the market. According to Aon Benfield, global reinsurer capital as of 30 June 2014 reached a record level of $570bn.
There aren't hard and fast measures here but a reasonable guesstimate is that so-called alternative capital now accounts for 10% total capital in the market.
What this means in terms of risk and capital could be hugely interesting, according to comments made by XL's CEO Michael McGavick, answering analyst questions in the wake of the company's third quarter results.
For McGavick, the capital bounty isn't a concern, it's an opportunity:
"We haven't done anything dramatic in this space, but we spend a lot of time thinking about it because in the end, if our underwriting powers can determine a solution for a client that is made better by using capital other than our own, we should do it."
"We have to be open to that because ultimately, if you are solving the clients' problem that's where we are in business and that's where we are well paid for our activities," he added. "So we are looking at a variety of models for how to achieve that."
XL should now, having set up last year, in conjunction with Stone Point Capital, New Ocean Capital, a re/insurance fund management vehicle with three main ILS funds. Of course this sort of thing isn't peculiar to XL, but it does illuminate the continuing importance of third party capital to the re/insurance market.
Whose capital will be underpinning the risks placed with insurers over the next few year? If the current trend continues, it looks increasingly unlikely to be, by default, shareholder capital.
For regulators this is going to make the whole terrain of capital adequacy even more challenging in future.
Marcus Alcock,
Editor, InsuranceERM
