Alternative capital sources such as catastrophe bonds and sidecars are reshaping global reinsurance and now account for almost 20% of the market, according to Guy Carpenter.

Investors have fundamentally altered what it means to be a reinsurer and how to add value in the risk transfer chain, the broker says in a report on the convergence of financial and reinsurance capital.

Investor appetite for reinsurance risk is largely not correlated to reinsurance pricing, Guy Carpenter says. The report questions whether investment capital is here to stay or will “disappear during the next financial market crisis”.

It notes alternative capital was attracted to reinsurance between 2008 and 2022 when interest rates were low and the property and casualty reinsurance market offered better returns.

Once interest rates began to rise, alternative asset managers went into sidecars, sitting alongside a reinsurer and taking a share of premiums and claims, while earning fees for managing assets.

Guy Carpenter notes traditional reinsurers price risks using decades of data and long-standing relationships with cedants, while alternative investors use third-party catastrophe modellers that remain imperfect.

It contrasts capital market culture with “real risks” culture, saying reputation is critical in the traditional market, with capacity expected to be available when disaster strikes.

“This is radically different from financial markets, ruled by contracts and where liquidity can dry up in situations of market stress. A deep understanding of both paradigms (reinsurance and financial markets) is paramount for the risk transfer mechanisms to be sound and effective over the long term.”

The liquidity of an alternative vehicle and the quality of collateral may also be an issue.

As the chain of risk transfer becomes more complex and opaque, it has become harder to see who ends up being the ultimate risk bearer.

Guy Carpenter sees sidecars remaining as part of the industry and says the growth of financial capital is likely to continue.

The integration of insurance risk into global capital markets is spreading who bears the weight of the world’s largest risks to millions of individuals with funds invested, it says.

Find the report here.