Germany-based reinsurance giant Hannover Re is embracing varied forms of alternative, or third-party reinsurance capital structures and solutions, and anticipates continued growth for the insurance-linked securities (ILS) sector in the future.
Alternative reinsurance capital continues to grow its share of dedicated reinsurance capital, expanding to $95 billion during the first-quarter of 2018 to now account for 16% of global reinsurance capital, underlining its impressive response to 2017 catastrophe events and subsequent losses.
A large number of insurers and reinsurers now leverage ILS in some form or another and reinsurance giant Hannover Re is one of the companies that is increasingly utilising the sector’s diversifying capital base and range of structures.
“Hannover Re takes advantage of the growing ILS market,” said Henning Ludolphs, Managing Director of Retrocessions & Capital Markets at Hannover Re, speaking with Reinsurance News.
“As in the past, large portions of our retro programs go to ILS investors, our K-Cessions quota share has increased to USD 600 million in 2018. Our transformer service remains dominated by the collateralised fronting model where we front approximately 1300 reinsurance contracts for the ILS investor community with overall first limits of around USD 4 billion. We expect moderate growth going forward,” he continued.
As well as utilising capital markets-backed capacity for its retrocession programmes and being active in the collateralised reinsurance space, the reinsurer has also worked on four catastrophe bonds, so far in 2018, and Ludolphs said that this could increase further.
“Not many catastrophe bond issuances involve a professional reinsurer as transformer but in particular natural catastrophe pools and associations see a variety of benefits including professional support on legal documentation, outsourcing of certain administrative work as well as execution certainty and speed.
“Having a professional reinsurer as a counterparty allows a certain distance to the capital markets with their different ways of looking at things and different set of regulations. We are proud of having been chosen as transformer for a number of catastrophe bond issuances. We look positively ahead and believe to have good opportunities to provide support on future catastrophe bonds issuance, new and renewable ones,” explained Ludolphs.
Furthermore, the reinsurer is also transforming life risks for ILS investors, which enables market players to diversify outside of the highly competitive property catastrophe space, where much of the focus of ILS remains, although the sector is increasingly looking to expand its remit and influence new business lines.
Commenting on the firm’s life transform unit, Ludolphs said: “Last but not least, our ‘youngest kid on the block’, our life transformer unit, has transferred several risks to ILS investors and we are seeing good opportunities going ahead. All transactions were private transactions and hence unfortunately they cannot be made public.”
Despite previous fears and comments that ILS investors and sponsors would run for the hills when losses finally happened, this wasn’t the case after the extremely costly second-half of 2017, and Ludolphs, like others in the re/insurance industry, agreed that investors in the space are here to stay.
“Investors however will have to learn that losses may further creep up even after almost a year. In particular, losses from Hurricane Irma are growing. However, last year’s hurricane losses did not shy investors’ money away. They rather saw them as a new opportunity and even more money came in,” he said.
As the ILS market continues to expand and increasingly looks to participate in insurance and reinsurance business outside of the property catastrophe space, its influence on the global risk transfer market is likely to continue growing.
Ludolphs explained how ILS investors are already supporting terror and cyber risks, while improved risk models for flood and other underserved natural catastrophe exposures around the world, is also expected to drive greater investments from the ILS community.
For insurers and reinsurers, the third-party capital arena provides a diverse and deep pool of willing and able capacity that market participants can utilise to augment their balance sheets during competitive and challenging times.