The insurance-linked securities (ILS) market and non-traditional or alternative sources of capital gained more ground at the mid-year June 1st and July 1st 2018 reinsurance renewals, as equivalence of coverage increased while ILS capacity began to expand its remit once again.
Continuing recent trends, the ILS market has demonstrated its robustness in bouncing back from the losses of 2017, with now little in the way of issues from the collateral trapped by those events impacting the ability of ILS funds to trade at the just completed mid-year reinsurance renewals.
In fact, it appears that the ILS fund markets and collateralized reinsurance underwriting vehicles have generally been gaining more ground at the renewals, both in terms of market share and also, perhaps more importantly, equivalence of coverage offered.
Equivalence of coverage is a key area of so-called convergence between the reinsurance and capital markets, as it reflects the ILS markets ability to offer coverage on a level playing field, which in turn implies further market share will be achieved in the coming months and years.
The latest reinsurance market report from Willis Re, which we also covered here this morning, highlights one of the very important areas of equivalence of coverage where ILS funds and markets are making inroads, in offering comparable protection to ceding companies.
During the recent Florida property catastrophe reinsurance renewals, the marketplace that remains ground-zero for ILS, Willis Re noted, “Non-traditional reinsurers offered larger lines and had more interest in reinstateable layers, which has historically been dominated by traditional markets.”
This expansion of the availability of coverage that is reinstateable, either through ILS markets directly allocating to layers of programs which feature reinstatement, or the provision of specialist reinstatement premium protection layers, is helping ILS to expand its remit again, gaining additional ground from traditional reinsurers.
ILS funds and collateralized vehicles have also been taking advantage of rated fronting carriers, or their own rated reinsurance vehicles, in order to offer more in the way of reinstatements and other coverage features.
At the same time, Willis Re’s report states that non-traditional and collateralized reinsurance markets increased their available capital in time for the mid-year renewals, which again helps in gaining more ground.
This has also pushed reinsurers to forego rate increases just to get signings, Willis Re’s report implies, as they explain that reinsurers had to defend their portfolios.
However, another interesting feature of the market right now, is that much of this portfolio defence is coming backed by third-party capital, as reinsurers ramp up their use of alternative capital as well, also implying more ground gained for the capital markets.
There were developments elsewhere in the reinsurance market as well, suggesting that alternative capital is on the move once again into new classes of business.
Willis Re noted that ILS activity outside of core property catastrophe risks has increased, now that the 2017 events have become less of a distraction to managers in the space.
This bodes well for an ongoing expansion of the ILS market, as the issues related to losses from 2017 subside and ILS funds are able to trade forwards and look more meaningfully at new opportunities.
Other areas where the capital markets continue to expand into reinsurance include the sidecar structure and related activity, which has seen an increase in 2018, according to Willis Re.
The broker explains that this is more strategically driven use of third-party capital structures, rather than a reaction to the 2017 losses, which is positive as it may see these vehicles becoming more permanent balance-sheets for their sponsoring insurers and reinsurers.
Another area with the potential for ILS expansion is the growing use of industry loss warranty and other reinsurance solutions in cyber risks, as these are beginning to gain favour as alternatives to quota share arrangements. The capital markets could find it has the ability and appetite to help satisfy demand for cyber ILW coverage.
One area where expansion has not been so clear at the mid-year renewals is in retrocession, as ILS capacity proved to be more constrained than the mid-year a year earlier, which Willis Re puts down to so much of the available limit having been deployed at January 1st and April 1st.
But overall the mid-year 2018 reinsurance renewals appear to have seen successful ongoing growth of ILS capital and expansion of its remit and market share.
This bodes well for continued growth into 2019, particularly where equivalence of coverage is so important for some ceding companies, providing opportunities for more meaningful relationships to be developed by capital markets players with some of the smaller to mid-sized reinsurance buyers.
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