Alternative capital moves from reinsurance competitor to partner

by Artemis on December 14, 2017

The impact on global reinsurance pricing that alternative, or third-party capital has had during its recent and impressive growth could be declining, as traditional market players have become more comfortable with the influential segment of the risk transfer space, according to industry experts.

For traditional reinsurance companies, conversations surrounding the influx of efficient alternative capital has increasingly moved away from competition to collaboration, with more and more market participants now eager to work with alternative capital in some form.

After the major losses of recent weeks it’s possible that this symbiotic relationship between alternative capital and traditional reinsurance could become even more important, as the fact rate rises may not live up to expectations at the January 2018 renewals could make capital efficiency all the more important.

The fact reinsurers are increasingly turning to ILS and alternative capital was highlighted by industry experts during a panel discussion at the 2017 Bermuda Reinsurance Conference in November, which was organised by Standard & Poor’s (S&P) Global Ratings and PwC Bermuda.

“The conversation is changing from traditional reinsurers versus alternative capital to traditional reinsurers and alternative capital,” said Tracey Dolin, S&P Global Ratings credit analyst.

A notion supported by panelist Scott Belden, Senior Vice President (SVP) of Reinsurance at The Travelers Cos., who said; “Initially we used alternative capital as a competitive lever – keeping the reinsurers honest. As time has gone on, and as the products that alternative capital offers have evolved, we’ve introduced alternative capital into our main program. We look at them now as part of the marketplace.”

Both the sponsor base and investor base of the insurance-linked securities (ILS), or alternative capital markets continue to grow in terms of maturity and sophistication, and as the product has developed over time, it’s persistently strengthened its position in the global risk transfer space, claiming an increasingly large slice of the overall reinsurance market pie.

In fact, analysis from reinsurance broker Aon Benfield shows that alternative capital neared $90 billion in size, as at June 30th 2017, an increase of 10% during the first-six months of the year, and taking its share of the overall reinsurance market to 15%.

In light of the high level of catastrophe activity in the third and fourth quarters of 2017 and the subsequent losses, 2017 is the first real test for the ILS market, and like traditional players, market participants will be pushing for rate increases at the upcoming key, January 1st 2018 renewals.

Whether the rate increases are achieved, or otherwise, the importance and use of alternative capital is likely to grow in 2018, as reinsurers still struggle to make the returns their shareholders would like and are increasingly pushed to heighten their own efficiency.

This is likely to accelerate the partnering of reinsurers with institutional investors, the launching of collateralised reinsurance vehicles and the use of ILS capacity for hedging and retrocession.

In fact, some companies may find alternative capital balance-sheets as the only way to make some lines of business work economically, allowing them to focus their own capital on areas of greater profitability.

All of which will only serve to make ILS an increasingly important piece of the re/insurance puzzle.

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