Byron-Ehrhart Aon Benfield

Bryon Ehrhart, CEO of the Americas at Aon Benfield, speaks with about the issues affecting alternative capital in the reinsurance market during the recent S&P Insurance Conference. He says the growth in alternative capital has been driven by clients seeking to diversify their sources of catastrophe risk capital and met with investors looking to diversify their investment return.

There has been a lot of discussion about what would disrupt the flow of alternative capital into the reinsurance marketplace. According to Mr. Ehrhart, interest rates would have to rise over 300 basis points before investors would seek other markets. If rates rise between 50 – 100 basis points, the opposite would happen – more capital would flow into the industry with high net worth individuals and pension funds looking for higher yields. Mr. Ehrart does not believe a large loss event would have an impact on the flow of alternative capital. His feels that insurers, reinsurers, and insureds learn from loss events. The same will happen with investors and that will not dissuade them from the market.

The flow of capital first affected reinsurers’ business model. Reinsurers now see alternative capital as a “mandatory element” and have sponsored catastrophe bonds and sidecars, and also manage assets for investors who seek diversification of yield.

Risk modeling plays an important role in attracting alternative capital, Mr. Ehrhart says. The models allow investors to compare deal-to-deal, and sector-to-sector.

Mr. Ehrhart expects alternative capital to enter the casualty marketplace and other short-tail lines, but Aon Benfield believes that “it is likely to go to commercial insurance first. It’s would be a “path of less resistance”, before solving some of the hard problems involved in doing a casualty-based securitization.

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