Excess capital means supply outstrips demand for reinsurance globally: Aon Benfield

Reinsurance intermediary Aon Benfield has published its latest reinsurance market outlook report which covers the state of the global reinsurance sector at mid-year and any items of note from the mid-year reinsurance renewal season. The report states that reinsurance capacity, measured by capital, reached its all time high point of $470 billion at the end of the first quarter of the year and this has led to supply of reinsurance continuing to outstrip demand globally.

The inflows of capital to the sector which have helped the reinsurance market return to the 2010 capital heavy high of $470 billion have helped to keep some pressure on rates meaning that rises have continued to be steady and as yet the market cannot truly be considered ‘hard’ globally. Aon Benfield notes that while 2011 was the second highest year for insured losses it was the highest for reinsured losses but renewals for loss affected programs proved orderly and the reinsurance market provided capacity on accretive terms. Rate rises on some loss affected programs were meaningful.

Interestingly the report notes that while we’ve been seeing capital inflows into the reinsurance market these only equate to one tenth of the capital that flowed into the market after Hurricane Katrina. So while the capital was sufficient to support capacity in loss affected regions it’s no surprise that a good amount flowed into alternative reinsurance vehicles and instruments such as catastrophe bonds and sidecars where it could be put to work.

Aon Benfield note that the catastrophe bond market has continued to enjoy an expanding position in the broader reinsurance and is growing in influence as a meaningful alternative to the traditional reinsurance market. Issuance of new catastrophe bonds has been very strong in the last three quarters and growing interest from investors has helped to provide insurers with better price visibility and multi-year commitments. These features are important to insurers, says Aon Benfield, and new demand continued to flow into the cat bond and ILS space.

The report says that the lower than average global catastrophe losses in Q1 along with increased premiums at 1st January renewals have helped reinsurer capital return to its 2010 high of $470 billion. They expect capital levels, and hence reinsurance capacity too, will continue to increase through the year as catastrophe loss activity remains low through Q2. Factor in the capital that continues to flow into non-traditional reinsurance vehicles and cat bonds and this number is likely to raise in their next report. You can see the way reinsurer capital changes from year to year in the graph below.

Change in reinsurer capital – Source: Individual company reports, Aon Benfield Analytics

Aon Benfield’s report goes into some detail on some of the headline issues affecting the reinsurance market in the recent quarter including the Florida Hurricane Catastrophe Fund’s funding levels, Citizens Property Insurance’s reinsurance mix (now including Everglades Re Ltd. of course), National Flood Insurance Program and the Atlantic hurricane season.

On the capital markets they discuss the success that the cat bond and insurance-linked securities market has seen in the first half of the year. Aon Benfield says that the oustanding ILS and cat bond market was worth $14.9 billion at the end of June 2012 which is up $3.4 billion from the same time in 2011. That’s very encouraging growth considering the low level of maturities expected throughout the rest of this year.

The report notes that spreads continue to be observed to be tightening in the secondary cat bond market and so Aon Benfield say that they expect this to produce a more competitive cat bond market in the second half of the year. Aon Benfield predict that issuance for 2012 will hit $6 billion as both seasoned and new investors remain keen to put capital to work.

On the industry loss warranty market the report says that this area continues to see increased capacity. The U.S. remains the dominant region for ILW trading but activity is increasing in Europe helped by the development of PERILS to facilitate European windstorm transactions.

You can access the full report from Aon Benfield here.