Acceptance of alternative reinsurance capital continues to rise: S&P

by Artemis on October 13, 2015

Insurance and reinsurance ratings agency Standard & Poor’s (S&P) has predicted the growth of alternative capital to persist in the global reinsurance sector, citing that reinsurers increasingly view it as a cycle management tool rather than a threat.

As large institutional investors continue to seek the returns, product and geographical diversification of the risk transfer markets, it’s widely expected that the bulk of alternative reinsurance capital will continue to expand its footprint within the international re/insurance space.

And, after speaking with industry executives and experts at the recent reinsurance industry event in Monte Carlo, S&P has echoed this view and notes that many of the people and companies it spoke with during the industry event expressed a similar outlook.

“Alternative capital continues to grow. Most reinsurers now view it as a cycle management tool rather than a threat, but some feel that it will be more disruptive if alternative carriers are able to broaden their coverage beyond commoditized lines,” says S&P.

The majority of traditional reinsurers now utilize some form of alternative capital within their reinsurance business, notes S&P, “and some traditional reinsurance products are looking to emulate features of ILS protections.”

However, owing to its focus on commoditized lines, which are easier to understand, have a greater database of historical losses and enhanced catastrophe-modelling capabilities, the ratings agency highlighted some uncertainty among traditional players surrounding how much of a potential threat further growth of alternative capital might present.

A Lloyd’s of London executive, notes S&P, underlined that “alternative capital is primarily used for commoditized lines of property insurance and reinsurance, and thus has limited impact on traditional reinsurers with well-diversified books of business.”

This has certainly been the case, and reflected in the persistently steep rate declines witnessed in the property catastrophe reinsurance market in recent times, exacerbated by benign loss activity and the influx of alternative reinsurance capital on top of the existing traditional sources of capacity.

And despite rate declines slowing somewhat as the flow of third-party capital declined slightly during mid-year 2015, pressure on rates is expected to continue as the January 1st renewal season edges ever closer.

While the larger, more diversified global reinsurers are better equipped to manage and ultimately feel less impact from the heightened competition in the sector, particularly in property catastrophe business lines, this isn’t the case for the smaller players, which increasingly feel pressured to enter into some form of merger and acquisition (M&A) activity in order to remain relevant in a tough operating environment.

With that in mind, should insurance-linked security (ILS), catastrophe bond and other alternative risk transfer investors start deploying capital into non-commoditized business lines, like casualty and others notes S&P, the well-diversified, larger reinsurers could see further market disruption driven by alternative reinsurance capital in the future.

“That may be difficult to achieve and in any event, it won’t happen quickly, in our view. But there was little question that these providers are here to stay, and the lines between ILS and traditional reinsurance are steadily blurring,” explains S&P.

The latter point raised here by S&P is one that has been discussed by numerous industry analysts and experts in recent months, most notably since alternative reinsurance capital really start to influence pricing and gain traction.

As is the view that the wave of institutional investors entering the space will remain after the sector experiences a large loss event, something that hasn’t happened since the bulk of alternative capital has become an important market force.

Looking forward, S&P says; “We expect that reinsurers will continue to harness the power of alternative capital because it provides some diversification to their income stream, allows them to grow their gross footprint, and protects capital by maintaining a more modest net position.”

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