The amount of alternative reinsurance capital in the global reinsurance market rose by 28% again in 2014, finishing the year with $64 billion of alternative or ILS capital deployed and outpacing the growth rate of traditional reinsurance capital significantly.
According to the latest edition of reinsurance broker Aon Benfield’s Aggregate report, which looks at reinsurer capital and trends as well as a deeper analysis of the financial results of 31 major reinsurers, this is the second consecutive year that alternative capital has grown by 28%.
In 2014 global reinsurance capital reached another high according to the Aon Benfield’s estimates, hitting $575 billion by the end of the year. That is growth of almost 6.5% across all types of reinsurance capital, as the total figure rose from $540 billion at the end of 2013.
In the last year traditional reinsurance capital grew by just 4.3%, from $490 billion at the end of 2013 to $511 billion by the end of 2014. In the same period alternative reinsurance capital outpaced it significantly, growing 28% from $50 billion at the end of 2013 to $64 billion at the end of 2014. Alternative reinsurance capital grew 18% to $59 billion by the middle of 2014, suggesting a slight slow down in growth over the second-half of the year.
It’s the second year running that alternative reinsurance capital, consisting of insurance-linked securities (ILS) such as catastrophe bonds, collateralized reinsurance, industry loss warranties (ILW’s) and structures such as sidecars, has grown by 28%.
In fact, since the end of 2011, so in just three years, alternative reinsurance capital has more than doubled, growing almost 130% from $28 billion at the end of 2011 to the $64 billion seen at the end of 2014.
Aon Benfield comments; “Alternative capital continued its strong growth, rising by 28% to USD64 billion in 2014. This was reflected in record levels of catastrophe bond issuance, expansion of fully collateralized placements, the establishment of new sidecar vehicles and the exploration of alternative business models by hedge fund managers.”
Alternative capital has driven down the costs of catastrophe risk transfer and reinsurance, according to the report. Reinsurers are now incorporating material alternative capital into their businesses, through the use of sidecars, ILS, and asset management mandates, in an effort to reduce their cost of underwriting capital.
Despite the well-documented pressure on pricing, increased retention by large cedents and general changes to reinsurance buying habits, Aon Benfield’s report shows that large reinsurers are still achieving premium growth.
That will be encouraging both for traditional and alternative reinsurance capital, as without any growth in premiums these two sides of the market would increasingly be competing for a shrinking pot of opportunities.
The chart above shows total premiums written by the group of 31 reinsurance companies that Aon Benfield tracks for its Aggregate report. As you can see, P&C gross premiums written have risen by almost 12%, with 9% growth in total premiums.
While this will be encouraging it’s important to note that while premium growth has outgunned growth of traditional capital, it has not grown anywhere near as quickly as alternative capital in reinsurance.
The chart above showing gross P&C premiums underwritten is perhaps more telling, as it shows where the growth is coming from. The majority of the growth is coming from insurance lines and two companies, the Berkshire Hathaway owned NICO (National Indemnity Co) and Gen Re. In fact reinsurance premiums are static.
So not such a positive story for those focused on reinsurance lines, given that these are the areas that alternative capital and ILS are targeting. It’s no surprise that increasingly reinsurers are looking to primary lines of insurance business as a way to get capital deployed.
The next useful chart shows who has been growing and who has been shrinking, in both insurance and reinsurance lines.
The growth of alternative capital has been positive for the ABA companies that have taken advantage of lower cost capital to improve their own risk transfer, at the same time many are managing or leveraging third-party investors alongside their own underwriting capital.
The evolution of the reinsurance business model continues apace, as it comes to terms with the structural shift in how insurance risk capital is raised and deployed.
The evolution of the business model also calls for scale and diversification, resulting in a number of ongoing merger & acquisition deals. It’s expected that we’ll see more of these deals over the coming year as the reinsurance sector continues to rationalise itself as a response to growing efficient capital, higher competition and structural change in the way risk is underwritten and moved down the risk transfer chain.
Mike Van Slooten, Head of Aon Benfield’s International Market Analysis team, commented; “Sector consolidation is underway as companies look to achieve the advantages of scale and diversification, one of the drivers being enhanced access to alternative capital. Three recently announced M&A transactions between ABA companies will reduce the number of entities in the study going forward.”
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