Alternative Capital disruption is still biggest story of decade:

The Alternative capital disruption is still the biggest story of this decade as the growth in alternative capital from pension funds, hedge funds, and sovereign wealth funds has fundamentally changed the return characteristics for insurance/reinsurance for the foreseeable future.

No matter where you look people are talking about disruption in various industries.  Insurance and Reinsurance are no exception.  We cover Insurtech firms to help consumers be better informed about options but the Alternative Capital growth is so powerful to all stakeholders in the system.

This influx of capital has allowed for the industry to pivot to explore front end technology enhancements and lower costs to consumers.

Regardless of what new technology is created, the ability to quickly and efficiently source capital for risk transfer should go down as one of the biggest disruptions to the industry of a generation.

Capitalization of industry

According to AON’s report, Record Capacity Sufficient to Meet Current Demand Increase and Future Innovations, Reinsurance capital continued to climb, increasing 5.3 percent to $595 billion through nine months at September 30, 2016.

The growth in alternative capital from $17B to $78B through 9M of 2016 is an astounding level of growth in alternative capital, that although small compared to the $35T of capital in the financial markets, is a meaningful amount to the Insurance/Reinsurance industry.

Alternative capital rate of growth

While traditional reinsurance capital also increased 4.7 percent during the most recent period, alternative capital increased by only 9.6 percent, the smallest growth it has reported in 5 years.  Although this signifies the rate of growth is slowing, it doesn’t suggest alternative capital is taking it’s money and going home.  In fact, it probably signifies other investment opportunities combined with adequate risk adjusted returns.

This result also may further suggest that traditional capacity is using all the tools at its disposal in order to stave off market share growth from alternative capital.  So this defensive or game theory approach to the market has incumbent insurance/reinsurance companies continuing their relevance in these markets.


According to AON, overall demand increased for the industry, but growth has been isolated to few regions and lines of business.

For January 2017 renewals, some insurers in the US and Europe looked to secure additional property catastrophe capacity as terms and conditions continued to move in their favor and/or they looked to meet new regulatory requirements and evolving rating agency thresholds.

While growth in new lines such as mortgage and cyber also continues, slow insurance growth in many regions with low primary insurance penetration saw stable reinsurance demand. Importantly, further evidence of insurer appetite for growth is surfacing in the form of investments in innovative insurer technologies in both organic and inorganic forms.

Meeting buyers’ interests

Beyond demand increases, new product and capacity is being deployed.  Insurers in a number of global regions also looked to increase the proportion of protection provided on a multi-year basis as reinsurers in turn looked to lock in participation.

This is the beauty of the alternative capital, it may provide opportunity to provide additional product, multi-year, increase coverage, etc. to customers which in turn can pay it forward to their customers.

Lowering the cost of capital

This increase in Alternative capital is a good thing as it helps insurers and reinsurers lower their cost of capital and become more efficient balance sheets.   This is a good thing for consumers and shareholders.

The companies that can source and deploy this capital the quickest with the lowest volatility around returns will win.  They will also have the ability to partner with the most exciting consumer facing disruptors as their capital costs are lower.


Disruption can come in many forms.

This post is less for the consumers and more for the industry pros, but as I highlight Insurtech companies, just realize the biggest insurtech to date has been the ability to source and increase the speed of capital into the market.

The companies that have the most efficient capital sourcing platforms may win long term.

About the author

Arnold Smith

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