Panellists at the 2019 S&P Global Ratings Bermuda Reinsurance Conference, held in early November, agreed that despite a recent pull-back and an expectation of lower returns going forward, alternative reinsurance capital is here to stay.
After experiencing record levels of growth, the impacts of 2017 and 2018 catastrophe losses resulted in a 4% decline in the volume of alternative capital in the first-half of 2019, to somewhere around the $93 billion mark.
A market retraction like this isn’t too surprising given the recent loss experience, subsequent loss creep and undesirable returns over the last two years, and while some investors have likely exited the space, others have taken a more cautious approach to the sector.
S&P notes that the alternative capital space remains a key component of the property catastrophe arena and according to Swiss Re estimates, represented 25% of total property cat risk supplied in 2018 and assumed as much as 30% of the losses from the trio of 2017 Atlantic hurricanes.
Insurance, reinsurance, and insurance-linked securities (ILS) experts and executives speaking at the 2019 S&P Bermuda Reinsurance Conference, discussed the evolution of the alternative capital space amid a challenging and educational couple of years for both managers and investors.
Addressing the audience as part of a panel debate, Aditya Dutt, the President of Renaissance Underwriters Managers and senior vice president at RenaissanceRe, said: “There are a lot of investors that have come into the market in the past two or three years, and their experience has been colored by the losses in that time, and so a number of them have left.
“Rather than look at one year, over the long term, the question is whether the core of our investor base will stay in the business, and I would say, yes, they unequivocally will.”
John Jenkins, Chief Executive Officer (CEO) at SCOR Americas P&C Reinsurance, echoed this sentiment.
“Alternative capital is here to stay, and we all need to learn how to work with it. I think what you’ll see is an ongoing evolution as they become more professional,” he said.
Industry commentary surrounding third-party, or alternative capital in more recent times has pointed to a more disciplined marketplace, with investors being more selective when choosing managers and also when selecting deals, on the back of elevated losses.
In light of heightened caution across the space, a conference polling question asked how much growth the ILS sector can expect in the year ahead, with 62% of respondents saying that they expect to see modest growth. Roughly one quarter said they see no growth next year, while 12% said they expect to see a modest decline. Interestingly, no one expects to see significant ILS market growth in 2020.
According to Des Potter, Managing Director at GC Securities, many ILS players were unprepared for the events of the last few years.
“One thing you don’t want as an investor is to be surprised. And the performance of the asset class in the past couple of years has been surprising,” said Potter.
While Rick Pagnani, head of Insurance-Linked Business at PIMCO, explained to the audience that managers are now starting to understand that “it’s going to be difficult to realize returns like those of the past 10 years.”
Peter Vogt, CFO at AXIS Capital, reiterated the permanence of alternative capital, saying that “it is not going to go away,” and called on traditional reinsurers to figure out ways of partnering with ILS to bring it into the reinsurance value chain.
The presence of alternative capital during the more recent renewals served to dampen rate improvements post-event, and in response, Brian Young, the President and CEO of Odyssey Group, told conference attendees that traditional players need to have more of a say at the renewals.
“The traditional market has to take ownership over pricing. In the U.S., when we look at competition, we’re looking more at traditional players than nontraditional,” said Young.
