Alternative capital hits $70bn, as traditional reinsurance shrinks: Willis Re

by Artemis on April 22, 2016

Alternative reinsurance capital growth outpaced traditional reinsurance in 2015, increasing 21% to reach $70 billion. A decline in traditional reinsurance capacity was offset by continued expansion of ILS, helping total reinsurance capital grow to $427 billion, according to Willis Re.

Alternative, or third-party reinsurance capital continues to have a greater influence on the overall reinsurance landscape, ending 2015 at $70 billion, which is $15 billion, or 21% higher than at the end of 2014.

During the same period traditional capital dedicated to reinsurance declined by a reported $13 billion, or 3.5% ending 2015 at $357 billion, compared with $370 billion a year earlier, says Willis Re.

The decline in traditional reinsurance capacity combined with the increase in alternative reinsurance capital saw overall capital dedicated to reinsurance at the end of 2015 total $427 billion, a 0.5% increased when compared with the end of 2014 ($425 billion), says Willis Re.

According to Willis Re’s numbers, alternative reinsurance capital’s share of the overall reinsurance market stood at 16.4% at the end of 2015, compared with 13% a year earlier, so a roughly 3.4% increase.

This highlights how third-party reinsurance capital continues to grow its influence in the reinsurance landscape, expanding its presence and contributing a larger portion of total, dedicated reinsurance capital.

“Reinsurers continue to face a myriad of headwinds placing downward pressure on underlying results. However, headline figures remain robust and capital positions are strong – the dual saviours of reserve releases and low severity loss experience continue to underpin reported results,” said Global Chief Executive Officer (CEO) of Willis Re, John Cavanagh.

“Yet underlying RoEs are now beginning to breach minimum target thresholds. The pressure persists with capital remaining at record levels amidst the continued influx of capital from non-traditional sources,” added Cavanagh.

Reinsurance brokerage Aon Benfield also reported recently on the increase in alternative reinsurance capital, noting that it continues to broaden its presence in the overall reinsurance marketplace as traditional capacity declined in 2015.

The growth of alternative, or third-party investor backed capacity in 2015 is underlined by the strong issuance of insurance-linked securities (ILS) and catastrophe bonds seen in the year, which, according to data from the Artemis Deal Directory saw $7.898 billion of transactions come to market.

Combine this with the continued expansion of collateralized reinsurance placements, sidecar ventures, and new, hybrid-style strategies that see re/insurers increasingly utilise the capital markets for capacity, and it’s not surprising that alternative capital grew by $15 billion throughout last year.

“Given the current climate, the broadening of reinsurer business models is proving a successful strategy for many and increasing relevance to clients, despite the impact on expense ratios. But ultimately, reinsurers will yet again be looking at another below average loss year to maintain acceptable results,” said Cavanagh.

In light of the continued and seemingly mounting pressures on global reinsurers in today’s market, underlined by a lack of losses, ample capacity, stiff competition, and ultimately diminished underwriting and investment profitability, it wouldn’t have been too surprising to see the overall volume of dedicated reinsurance capital decline in 2015.

But while the pressures and resulting environment of reduced returns led to a decline in traditional reinsurance capacity, the increased maturity, acceptance, and ultimately utilisation of alternative reinsurance capital ensured the global reinsurance market grew by $2 billion in 2015.

It will be interesting how the overall reinsurance sector and the traditional/alternative sub-sectors fare in 2016, as the array of challenges witnessed last year have so far persisted.

At the same time ILS and catastrophe bond issuance during the first-quarter of 2016 broke records, with an impressive $2.215 billion of issuance brought to market, the busiest Q1 in terms of volume ever seen.

Should losses remain benign, rates down and competition from both alternative and traditional players remain plentiful, it’s possible that 2016 will end in a similar way to last year.

Reports have suggested that the influx of alternative reinsurance capacity had started to wane when compared with last year, but should the cat bond and ILS market continue the trend set in Q1 it’s possible that it will increasingly claim a larger share of the overall reinsurance marketplace once again.

It is perhaps a sign of a rebalancing of capital, from balance-sheets to third-party ILS style structures, which could be a continuous trend as the reinsurance market searches for efficiency. With so many reinsurers looking to add a third-party capitalised structure to their businesses, alternative capital seems assured of growth and perhaps continued increase of overall market share.

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