Alternative reinsurance capital growth outpaced traditional: Aon Benfield

by Artemis on September 8, 2015

Alternative capital continues to grow its presence in the global reinsurance industry, rising by 6% during the first-half of 2015 to $68 billion, while traditional capacity fell by 3%, according to international reinsurer Aon Benfield.

Alternative capital’s share of the global reinsurance market’s capacity totalled $68 billion at June 30th, 2015, representing a 6% increase from the end of 2014 and is “reflected in near record issuance levels of catastrophe bond issuance, further expansion of fully collateralized placements and growing utilization of ‘sidecar’ vehicles,” said Aon Benfield.

Furthermore, and as highlighted in the graph below, the volume of traditional reinsurance capital in the sector declined by 3% by the end of June 2015, equating to $497 billion of the estimated $565 billion of overall, global reinsurer capital, reports Aon.

Global reinsurance capital, alternative capital outpacing traditional

Global reinsurance capital, alternative capital outpacing traditional

Albeit at a slower pace than previously, notes Aon in its recent publication ‘The Aon Benfield Aggregate – Results for the six months ended June 30, 2015,’ alternative capital is continuing to gain an increased share of the global reinsurance market, aided by the growing acceptance of alternative risk transfer solutions such as cat bonds, collateralized reinsurance and sidecars.

Despite the 6% growth in alternative reinsurance capital Aon Benfield reports that overall the volume of global reinsurance capital fell by 2% during H1 2015.

“The headline reduction of 2% relative to the end of 2014 was driven by strengthening of the US Dollar over the intervening period. On an underlying basis, the capital available to support reinsurance underwriting was flat, with retained earnings offsetting unrealized losses on bond portfolios,” explained Aon.

Importantly though, and something that we’ve discussed here on Artemis numerous times in recent months, global reinsurer Aon Benfield notes that reinsurers “continue to incorporate material alternative capital (through ILS, sidecars and asset management mandates) to lower their cost of underwriting capital.”

Multiple industry experts, analysts and re/insurance ratings agencies have stressed the importance of embracing the glut of alternative reinsurance capital in the space, urging firms to utilise its benefits or avoid missing opportunities, which in turn could lead to them losing relevance, market share or both.

So it’s promising to hear that a large, global reinsurance operation, like Aon Benfield, has identified that traditional players are continuing to implement third-party capacity into their reinsurance programmes.

“The landscape of the reinsurance industry is changing, driven by market dynamics in the developed world and the rising influence of Asian capital,” said Mike Van Slooten, Head of Aon Benfield’s International Market Analysis team.

Although Aon’s report highlights that overall reinsurance capacity fell by 2% during the first-half of the year, the burgeoning economies of the world, including Asia-Pacific, Latin America and China, all have a desire to increase insurance penetration levels amidst the growing threat of increasingly severe and frequent catastrophe events, and a global effort to build disaster resilience in the most vulnerable parts of the planet.

More insurance take-up means a greater demand for reinsurance, which, in an evolving re/insurance industry signals further geographical and product growth opportunities for alternative risk transfer schemes and structures.

The growth of alternative reinsurance capital is certainly no industry secret; catastrophe bond issuance alone so far in 2015 has surpassed $6 billion, leaving the current outstanding cat bond market just shy of $25 billion.

And as the emerging regions of the globe continue to develop their re/insurance markets and catastrophe modelling capabilities improve in areas that lack historical and current data, the use of alternative risk transfer solutions from ILS, cat bonds and so on, will rise further.

So it seems apparent that growth in the amount of alternative and traditional reinsurance capacity will likely rise as the ability to adequately and efficiently cover a range of emerging underserved risks spikes.

Whether alternative growth continues to outpace traditional capital remains to be seen, but one thing does seem certain; third-party, or alternative reinsurance capital providers aren’t going anywhere fast, and as it increases its share of the sector’s overall capacity the lines between the two will become ever more fuzzy.

Mike Van Slooten concludes; “Discerning reinsurance buyers will continue to benefit in this environment, but the level of complexity is increasing and understanding broader industry trends has never been more important.”

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