The reinsurance industry may attract about $100 billion of new capital from alternative sources over the next five years as pension and hedge funds boost investment, according to broker Aon Plc.

Companies such as Munich Re, the biggest reinsurer, and Swiss Re Ltd. will benefit as the capital helps reduce costs, Bryon Ehrhart, chairman of Aon Benfield Analytics, said at a press conference in Monte Carlo yesterday.

Capital accumulated by reinsurers stood at $510 billion at the end of June, just below a record $515 billion three months earlier, according to Aon Benfield. It estimates that about $44 billion of that capital is coming from non-traditional reinsurance such as collateralized reinsurance, catastrophe bonds and sidecars, special-purpose vehicles that let investors participate in a carrier’s business.

(Editor’s Note: Carrier Management first reported the predictions that Aon Benfield presented at the Rendez-Vous de Septembre in Monte Carlo, in a feature article published in August. For more details of CM’s interview one-on-one interview with Ehrhart, see related article, “Hurricane Would Entice–Not Spook–ILS Investors” and podcasts, “Aon Benfield’s Bryon Ehrhart On Investor Demand For Insurance-Linked Securities and Reinsurers Need To React Now To ILS Market Shift: Aon Benfield Exec.)

While these buffers are used as a cushion against natural catastrophe losses, the surplus of funds means primary insurers such as Allianz SE and France’s Axa SA can demand lower prices on reinsurance policies to limit losses when disasters strike.

Attractive Returns

While some of the new capital could move to more attractive returns when interest rates start rising, the majority will stay, David Priebe, vice chairman of Guy Carpenter, the reinsurance broker of Marsh & McLennan Cos., said in Monte Carlo.

Most insurance-linked securities offer interest rates defined as a risk spread on top of returns on U.S. treasuries, “so as interest rates go up, the asset class will continue to be attractive and remain non-correlated,” Priebe said. “Right now, the whole reinsurance market represents just 1 percent of global pension fund assets.”

In the past 18 months, $10 billion of new capital has entered the market, driven primarily by increased supply from institutional investors, Guy Carpenter estimates.

An influx of third-party capital into the reinsurance market may displace as much as $40 billion of traditional equity in the industry, which could be returned to shareholders or invested elsewhere, John Cavanagh, chief executive officer of Willis Re, the reinsurance brokerage of Willis Group Holdings Plc said yesterday.

“$100 billion of additional capital from non-traditional reinsurance wouldn’t be unfeasible for the next three to four years.”

Reinsurers are meeting with brokers and primary insurers in Monte Carlo this week to negotiate next year’s property and casualty policies. Discussions will continue in Baden-Baden, Germany, in October. Allianz, Axa and other primary insurers buy reinsurance to help them shoulder claims from costly events such as natural disasters.

Editors: Jon Menon, Simone Meier