A Swiss Re report has highlighted alternative capital (AC) as an important segment of the property catastrophe and retrocession market, representing 20-25% of global reinsurance capacity.
The report also notes how AC prices typically move in parallel with traditional reinsurance so is experiencing rate hardening in line with the wider sector.
In the January 2021 renewals, reinsurance rates are reported to have hardened in virtually all lines of business and regions globally.
This hardening was prompted by a general repricing of risk driven by high natural catastrophe losses, increasing liability claims and pandemic-related claims estimated at $50-80 billion.
Swiss Re’s report notes how the AC market is bifurcating as investors strongly favour cat bonds and sidecars over collateralised reinsurance (CR).
In 2020, cat bond issuance is reported to have reached a record 49 bonds with an aggregate volume of $11.7 billion and pricing reached the highest level since 2013.
The average multiple rose to 2.7x in 2020, up from a low of 1.88x in 2017, and Swiss Re expects this to rise further by mid-year 2021 as demand outstrips supply.
Meanwhile, demand for cat bonds is rising as investors increasingly favour more liquid and transparent AC securities.
In contrast, CR have reportedly suffered poor returns in recent years. These have resulted from unanticipated (and unmodeled) loss exposures since 2017, loss creep for certain large nat cat events, and COVID-19 business interruption claims.
Investors have also experienced trapped capital, in which repayment of principal is delayed until final loss figures are calculated and paid.
Swiss Re expects rate hardening momentum to continue throughout 2021, with increases in both traditional reinsurance prices and cat bond multiples.
