With third-party investors putting increased levels of capital into catastrophe bonds, sidecars and collateralized reinsurance, pricing in the capital markets is now, for the first time, “decoupled” from levels set by the traditional reinsurance market, according to a briefing released by Guy Carpenter on Tuesday.

The reinsurance broker reports that this “breakaway” pricing has, in turn, put downward pressure on overall traditional market pricing, noting that this downward trend is expected to continue through the remainder of the year—and into January 1 renewals, barring any significant catastrophe losses.

“As seen in this year’s July renewals, the excess capital in the market, and more importantly, the behavior of that capital, has encouraged a dramatic shift that triggered downward pricing in the traditional market in order to remain competitive,” says Lara Mowery, Global Head of Property Specialty at Guy Carpenter.

Guy Carpenter says that convergence capital now accounts for $45 billion of the total global property catastrophe limits—or roughly 14 percent of the market.

Through July 1, Guy Carpenter estimates issuance of catastrophe bonds at $4.2 billion, with risk capital outstanding likely reaching an all-time high of around $16 billion.

Excess capital helped mitigate the impact of catastrophe losses resulting from severe tornado activity in the United States and floods in parts of Europe, India and Canada during the second quarter of 2013, the report says.

“For the third consecutive year, we’ve seen a significant shift in market conditions during the second half of the renewal season. This behavior is contrary to the market’s historical precedent, as the factors that typically impact the mid-year renewals are normally driven by those already present in January,” Mowery said.

David Flandro, Global Head of Business Intelligence at Guy Carpenter, notes that while significant decreases were evident for U.S. property catastrophe program pricing at July 1, the impact of convergence—while less dramatic in other regions and other lines—was nonetheless felt throughout the market, even across some casualty lines.

The Guy Carpenter briefing provides pricing highlights by segment, including the following:

  • In Latin America and the Caribbean, a high level and diversity of reinsurer offerings led to property rate reductions at July 1. The exception to this trend was Argentina, which suffered significant flood losses in April 2013 and faces a reduced offering due to regulatory restrictions.
  • Property retrocession business saw significant rate decreases, with the greatest risk-adjusted reductions achieved on growing portfolios. Further downward pricing pressure is expected through the remainder of the year, absent a significant loss.
  • Reinsurance rates for global marine and energy lines varied at July 1 dependent on territorial region and loss-free/loss-hit business.
  • While aggressive pricing caused terms for industry loss warranties (ILWs) to tumble in early 2013, the market has shown signs of increased activity with the peak U.S. wind season approaching
  • Indications of a soft workers compensation reinsurance market continued through the first and second quarters of 2013.
  • Reinsurance for professional lines remained competitive in all sectors, with the possible exception of larger financial institutions.