Inside View - Ready for an atomised market?

(From Reinsurance)

Byline: Edmund Megna is vice-chairman of Guy Carpenter.

As we all learned during Hurricane Katrina, the mighty Mississippi river splits up into multiple channels in the coastal lowlands of lower Louisiana and Mississippi, forming a delta with many outlets to the sea. In an analogous fashion, there are now many channels for investor capital to flow to insurance risk.

First, there is the traditional stock purchase method. An investor can purchase outstanding stock of an insurer/reinsurer or participate in a new stock offering of an existing insuer/reinsurer. In regard to the latter, we calculate that $12.5bn in new capital was raised by existing companies after Katrina.

Second, investors can participate in start-ups - we saw a burst of this activity in the last few months of 2005, adding $8.5bn to insurance capital.

Third, an investor can purchase catastrophe bonds. In 2005, capital allocated to these instruments almost doubled to $2.1bn in at risk capacity.

In recent years, we've seen investor capital supporting reinsurance risk through "side car" facilities, where risk capital is available to individual reinsurers.