The huge influx of third-party capital has been a recurring theme at this year’s Reinsurance Rendezvous in Monte Carlo.

The low-interest-rate environment has attracted capital to the sector on an unprecedented scale, and in just a few years it could total $US100 billion ($107.85 billion) a year – 30% of the global property catastrophe reinsurance market.

But what does it mean for the industry?

Reinsurance broker Willis Re warns of “profound” consequences, with up to $US40 billion ($43.14 billion) of traditional equity capital displaced. This could either be returned to shareholders or redeployed elsewhere in the (re)insurance market.

Lloyd’s Chairman John Nelson goes further, saying the rise of non-traditional capital could lead to “systemic problems” similar to those seen in the banking industry.

“Some of the structures being used could undermine some of the qualities of the insurance model,” he said, adding that insurance “can be a dangerous business to those who do not understand it”.

However, reinsurer Swiss Re does not see the changing dynamics as a threat.

“We take the inflow of alternative capital seriously, but we are not alarmed by it,” Group Chief Underwriting Officer Matthias Weber said.

“Swiss Re can take advantage of its capital markets expertise and at the same time compete successfully as a full service provider.

“However, smaller, less-diversified reinsurers will be under significant pressure.”

Alternative capital is focused on peak exposures in the US natural catastrophe markets, “where entry barriers are low and margins high”, Swiss Re says. It “still needs to be tested” in case of increasing interest rates or large losses from natural disasters.

The company expects demand for natural catastrophe reinsurance to double in high-growth markets and rise about 50% in mature markets by 2020.

Swiss Re estimates prices for natural catastrophe covers will stabilise next year after a decline this year.

Reinsurance broker Guy Carpenter’s President and CEO Alex Moczarski says the continuing influx of new capital has been “the biggest issue this year by far. A record amount has entered and it has had a clear and direct effect on market conditions.”

The impact has been most dramatic in the US, he says.

“For the first time, the ILS [insurance-linked securities] market offered prices comparable to or lower than those of the established reinsurers, ending the general stability and consensus of post-Katrina catastrophe pricing, especially in Florida.

“Strong appetite tightened spreads for US hurricane catastrophe bonds, forcing the traditional reinsurers to react by cutting Florida risk-adjusted renewal prices by about 15% at the June 1 renewal.

“It was a tipping point for the reinsurance industry.”

A report from reinsurance broker Aon Benfield says insurers and reinsurers will benefit from the $US100 billion of alternative capital expected to enter the market over the next five years.

“The benefits of this new capital will begin to extend beyond property catastrophe and mortality risks that are common features of the current ILS market and extend into many other reinsurance lines, where loss frequency and severity are more predictable,” the report says.

“The January 1 renewal market for our clients will benefit materially from an excess of traditional reinsurance capacity and new alternative capital flows over light demand growth for reinsurance capacity.

“Therefore, our clients should expect to benefit from a competitive market even if a moderate hurricane season should develop.”

Munich Re, as previously reported, predicts largely stable renewals for its portfolio, despite the overall economic situation remaining “clouded by uncertainty”.

The German group says reinsurance is still indispensable for many primary insurance clients and it expects “tangible growth” in the global insurance industry, particularly in Asia’s emerging markets.

Hannover Re expects “to achieve conditions that appropriately reflect the risks” and says demand for reinsurance protection should be stable.

“This expectation is supported by the rising concentrations of values in urban conurbations and by the adoption of risk-based solvency systems in Europe and Asia,” it said.

Recent floods in Europe and Canada should have a stabilising effect on rates.

For catastrophe business in Australia and New Zealand, Hannover Re says a “good price level” was maintained in this year’s renewals and it “does not expect to see any changes on the pricing side or structurally in the year ahead”.

Rendezvous de Septembre Association Chairman Claude Tendil told an audience in Monte Carlo that the global insurance industry generated income of $US4.6 trillion ($4.96 trillion) last year, with $US227 billion ($244.81 billion) from the reinsurance sector.

The annual Reinsurance Rendezvous has brought the major industry players together since 1957.