Alternative reinsurance capital on track to hit $150B by 2018: Aon Benfield

by Artemis on April 7, 2015

The alternative reinsurance capital growth rate experienced in 2014 suggests that the insurance-linked securities (ILS), collateralized reinsurance and catastrophe bond space will hit $150 billion of capital by 2018, according to Aon Benfield.

Alternative capital in the reinsurance sector grew by 28% in 2014, leaping from $50 billion at the end of 2013 to almost $64 billion at the end of last year. That growth rate is aligned with Aon Benfield’s forecast from 2013, when the broker said it expected to see another $100 billion of capital inflows over the coming five years.

The prospect of a $150 billion in size insurance-linked securities (ILS) and alternative reinsurance capital market will not be something that traditional reinsurers will relish. It underscores the importance of finding ways to leverage and work with third-party capital, either by managing it or partnering with it.

The prospect of $150 billion of alternative reinsurance capital needing to be put to work also suggests that reinsurers will need to develop their third-party capital or ILS initiatives carefully, to ensure they are not cannibalising profits from their businesses.

It also suggests that demand needs to rise, something Aon Benfield addresses in its latest reinsurance market report, saying that it sees signs of a heightened demand for reinsurance capital as a route to support insurance growth. More on that in a future article.

Aon Benfield concurs with Artemis’ view that first-quarter 2015 catastrophe bond issuance has been the highest ever seen for the period in the market’s history, a sign of continued interest, acceptance and growth of the ILS market.

The impact of alternative capital remains most felt in the property catastrophe reinsurance market, where its efficient lower-cost model has significantly disrupted incumbents. However Aon Benfield notes that the next phase of disruption is, as the broker had previously suggested, coming in property insurance, rather than casualty reinsurance.

The emergence of primary insurance carrier and broker partnerships with ILS players and alternative capital shows that property insurance premiums are the next target area for the alternative capital players.

The incorporation of lower cost alternative capital into the reinsurance market is accelerating, Aon Benfield notes.

Catastrophe bond capacity continues to be a significant piece of the total capacity provided by the non-traditional reinsurance market. However it is collateralized reinsurance that is really driving the growth of the alternative capital total.

Cat bond capacity grew by over $4 billion in 2014, Aon Benfield reports. Artemis recorded a 22% growth in the size of the outstanding cat bond market in 2014, from $20.5 billion to $25 billion.

By comparison, Aon Benfield says that collateralized reinsurance capacity grew by over 25% from $23.4 billion to $29.4 billion over the course of the year. Meanwhile reinsurance sidecar and ILW capacity continues to provide a smaller source of capital to the reinsurance market, but also saw significant percentage increases, growing 59 percent and near 100 percent respectively in 2014, according to Aon Benfield’s figures.

Growth of alternative reinsurance capital and ILS instruments

Growth of alternative reinsurance capital and ILS instruments - Source: Aon Benfield Securities

The growth of alternative reinsurance capital is far outpacing traditional reinsurance capital growth in recent years. If the trend continues at the rate Aon suggests, alternative capital will make up an increasingly large proportion of global re/insurance capacity, a trend which will ensure that even the very largest traditional players will have to learn to live with it, embrace it and leverage it.

The growth rates of traditional and alternative reinsurance capital

The growth rates of traditional and alternative reinsurance capital - Source: Aon Benfield

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