As third-party capital from Insurance Linked Securitisation (ILS) continues to flow abundantly into the market, reinsurers have increasingly turned to instruments such as sidecars, collateralised reinsurance, and catastrophe bonds in order to increase premiums whilst maintaining net exposures – says S&P Global Ratings in a report published today.
Even after severe natural catastrophe events in 2017 caused $138 billion in insured losses globally, there was, unexpectedly, more than enough inflow of alternative capital to renew coverage for cedants on Jan 1, 2018.
This went against many observers who had assumed that investors, having entered the ILS market during a string of benign catastrophe years, would take flight when investment returns turned negative.
As a result, there was a suppression of the extreme price hikes that would traditionally have followed such severe losses.
In fact, the latest figures from our sister site Artemis, as well as alternative capital industry data, show that ILS funds had combined assets under management of nearly $100 billion by July 2018.
S&P Global goes so far as describing alternative capital as having “conquered the property catastrophe business” and considers areas such as casualty or life reinsurance as the next logical step – although the increased complexity and longer tail of products in these sectors have yet to strike a chord with investors.
S&P Global explains that, despite suffering from increased competition and the limited price increases following major events, reinsurers have harnessed the new capital inflows to channel this capacity and optimise their in-house portfolios
The various options, such as sidecars, catastrophe bonds, and collateralised reinsurance, allow reinsurers to create more-comprehensive offerings for their clients.
As a result, the retrocession market is increasingly dependent on third-party capital, whilst regulatory changes such as the introduction of new ILS legislation in the UK this year, will support further growth in the sector.
