The volume of alternative, or third-party capital in the global reinsurance market declined in 9M 2019 for the first time in more than a decade, but despite this, analysts at S&P Global Ratings have said that it is still an integral part of the marketplace.
At $93 billion, the volume of available, alternative reinsurance capital at the end of the third-quarter of 2019 accounted for around 15% of the $625 billion of total reinsurance capital, according to re/insurance broker Aon’s figures.
This figure remained unchanged from six months prior, driven by a combination of market dynamics including loss creep, trapped collateral, and in general, a more cautious approach from investors after consecutive heavy loss years and pressured, inadequate pricing across the property catastrophe space.
In addition, and as highlighted by S&P, the $93 billion of assets under management (AuM) included roughly $15 billion of trapped collateral, with some reporting that this figure likely jumped to around $20 billion ahead of the Jan 1st 2020 renewals in light of losses and adverse development from prior year events.
But in spite of the recent challenges that have impacted both the alternative and traditional reinsurance market, analysts at S&P feel that the recent slowdown isn’t a long-term trend.
“However, we believe the pullback is just a blip in a prolonged period of greater influx and influence from nontraditional third-party capital sources. While alternative capital accounts for about 20% of total property-catastrophe reinsurance capacity, it provides more than 75% aggregate retrocession capacity. Therefore, its influence on reinsurance and retrocession pricing can’t be understated,” say analysts.
The alternative capital market, which is dominated by collateralised reinsurance business and the expanding catastrophe bond sector, remains a vibrant one, explains S&P, and, over the long-term, investors have experienced good uncorrelated returns.
Investors in the space are increasingly more sophisticated and understanding of the asset class and importantly the risks that underpin the marketplace, and while the recent loss experience undoubtedly caused some pain, it served as a good reminder that in the catastrophe space, it is always a matter of when and not if disaster strikes.
“The recent drop also highlights that investors are increasingly scrutinizing this product and, perhaps, that the less sophisticated capacity has exited. In addition, the case for investing in insurance risk to diversify in a low interest rate environment remains valid,” says S&P.
For investors, insurance-linked securities (ILS) solutions such as catastrophe bonds provide an effective way to access the returns of the catastrophe reinsurance sector, and increasingly other lines of insurance and reinsurance-linked business outside of the nat cat space.
One thing that has been noted in recent times and which is also discussed by S&P, is that a flight to quality now exists in the ILS space with investors differentiating and becoming more selective when choosing managers.
For insurers and reinsurers, the alternative capital space offers a valuable source of capacity and structure diversification, and for huge exposures such as the protection gaps of the world and things like cyber risk, it’s very likely that the capital markets is required in order to adequately and efficiently address these types of vast and unpredictable exposures.
“We believe alternative capital backed by long-term investors remains committed to property-catastrophe risk and is here to stay, as it expands to other lines of business such as mortgage and in-force life and annuity blocks. We expect that, once the bumps are smoothed over and the recent losses and unfavorable reserve developments are fully digested, growth will likely resume,” says S&P.
While the market slowed in 2019, the volume of outstanding catastrophe bond and ILS issuance at the end of 2019 reached a new high, of approximately $41 billion. This is according to data from our sister site Artemis and its extensive Deal Directory, and accompanying Q4 and full-year 2019 ILS market report.
Issuance did decline year-on-year to $11.1 billion in 2019, but remained strong overall as a result of the continued rise of mortgage ILS deals but importantly, the rebound of catastrophe risk deals, which, included new sponsors, geographies and perils.
Overall, S&P notes that alternative capital “still plays an integral part in the global reinsurance market despite its recent decline.”