Alternative capital’s rapid reload didn’t block rate hardening: Peel Hunt

After 2017 catastrophe losses provided the biggest test so far for the alternative reinsurance capital space, the sector had reloaded in time for the January 1^st renewals faster than expected, and unlike some had anticipated, it didn’t block any rate hardening, according to Peel Hunt analysts.

Insurance and reinsurance industry losses of a reported $136 billion from 2017 natural catastrophe events make it one of the costliest years on record, driven primarily by hurricanes Harvey, Irma and Maria, and the Mexico earthquakes in Q3, further exacerbated by the California wildfires in the final quarter of the year.

The catastrophe loss experience had been relatively benign for some time, a trend that coincided with the impressive growth of the alternative, or third-party reinsurance capital space, which at around $90 billion in 2017 accounted for a meaningful and influential segment of the global reinsurance industry post-Q3, particularly the U.S. property catastrophe arena, which experienced the bulk of the 2017 losses.

In the aftermath of the events and throughout the closing weeks and months of last year, industry commentary focused not only on how meaningful and sustainable any rate increases might be at renewals, but also what the losses meant for the alternative capital space, how investors and sponsors would react and whether sufficient capital would be able to be raised for 1/1, ultimately mitigating the trapped collateral issue.

“Alternative capital has reloaded but it is not standing in the way of a rate hardening, although admittedly capping a stronger cycle turn,” said Peel Hunt analysts.

Analysts continued to note that the reloading of alternative reinsurance capital happened faster than expected, and that third-party investor-backed capacity has been put to work at higher, and not lower rates, as insurance-linked securities (ILS) investors look to take advantage of any post-event price hikes, just like the traditional players.

And while analysts said that alternative capital has so far not stood in the way of rate hardening, it has capped rate momentum during the January 1^st, 2018 renewals.

Despite the heavy losses experienced in 2017, the growth of ILS alongside the benign loss experience of recent years and greater primary insurer retentions, meant the overall reinsurance marketplace was able to absorb recent losses while remaining well-capitalised post-event.

This, combined with the ability of ILS to reload in time for the January renewals appears to have limited January 1^st 2018 renewals price hikes, with many reinsurers disappointed at the level of increases.

“For reinsurance rate increases to gain further momentum, we would need to see an ongoing willingness of alternative capital to sit on the sidelines and only put capital to work at attractive returns,” explains Peel Hunt, in a recent Lloyd’s insurers market note.

Analysts at Peel Hunt expect to see further rate increases at the mid-year U.S. renewals, of between 10% to 15%, which will play a vital part in the justification of a greater increase in underwriting capacity.

“Ultimately, the cycle is finally moving in the right direction and there is enough economic evidence to suggest the cycle should harden further notwithstanding the excess capital in the sector,” concludes Peel Hunt.

These comments will encourage some reinsurers and ILS fund managers, that rate increases may persist for longer than had been thought.

It’s certainly true that ILS funds and collateralized reinsurers were largely supportive of rate increases at January 1st, eager to recoup some of their losses and to see certain property catastrophe zones repriced upwards a little.

But with anecdotal evidence from the renewals suggesting that a lot of the rate pressure felt, especially late in the renewal, came from traditional reinsurers keen to fill their order books at 1/1, it may take more determination to prop up rates from a broader cross-section of the market if pricing is to hold up at the mid-year.