Increasing third-party capital in the reinsurance market will have “profound” consequences, Willis Re says.

Such capital could soon account for $US100 billion ($107.85 billion) – 30% of the global property catastrophe reinsurance market. This may in turn displace up to $US40 billion ($43.14 billion) of traditional equity capital.

Willis Re CEO John Cavanagh says even after returning capital to shareholders, there could be $US20 billion ($21.57 billion) excess equity capital to be deployed.

“You could think of this as being the equivalent of 10 well-capitalised start-up companies, and the effect on the marketplace would be profound,” he said at the Reinsurance Rendezvous in Monte Carlo.

“If capital is redeployed, much of it could go into direct insurance businesses. Many of the hybrid specialty reinsurers are already implicitly going down this path.”

The influx of capital, along with changes to reinsurance buying patterns and regulation, is leading to growing complexity in the reinsurance market.

“Solid analytical advice and market knowledge through intermediation is needed now more than ever,” Mr Cavanagh said.

Willis Capital Markets and Advisory CEO Tony Ursano expects an active capital markets and mergers and acquisitions (M&A) environment going into next year.

“On the capital markets side, we expect a very active cat bond calendar, including new and renewal sidecar financings, additional activity around new insurance-linked securities, fund formations and strategic partnerships, as well as more new hedge fund-sponsored reinsurers.

“We expect activity in the insurance M&A arena to be robust, driven by a number of factors. These include increased CEO and board-level confidence derived from higher public valuations, a continued focus on growth, scale and diversification, private equity involvement as both buyers and sellers, and the gradual consolidation of the reinsurance sector driven in part by third-party capital involvement.”

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