Alternative capital, insurance-linked securities (ILS) and collateralized reinsurance will maintain its influence on global reinsurance pricing, as a “key driver of the magnitude of future rate increases,” even after the recent major catastrophe losses and the trapping of collateral.
Fitch Ratings maintains its negative outlook on the global reinsurance sector, although its company ratings outlook is stable, as it expects the market forces of competition and capital will continue to stress reinsurers ability to make larger profits.
In fact, Fitch notes that if the outlook on recent losses worsens, it could turn negative on reinsurer ratings as well.
“Significant development in loss estimates or additional large loss events before year-end could change the sector’s rating outlook to negative from stable. The significant 3Q17 catastrophe losses will push the global reinsurance sector to an underwriting loss for the year, with a forecast 2017 aggregate combined ratio of 109.7% for Fitch’s universe of monitored reinsurers, the weakest since 2011,” Fitch explained.
Fitch does expect that reinsurance rates will increase, following the major catastrophe losses suffered in 2017 so far, especially across U.S. property catastrophe reinsurance and in the retrocession market.
However, it notes that ILS and alternative capital will be a “key driver of the magnitude of future rate increases” citing “the insurance-linked securities market’s appetite to invest more capital in reinsurance” as a factor that will have influence on reinsurance pricing going forwards.
So far, there seems little evidence of any reduction in capital market investors appetites to assume insurance and reinsurance risk, in fact the capital raises completed so far and the proliferation of new start-up ILS ventures and funds would all suggest that interest in investing in catastrophe risks has risen following the major loss events and could actually be at an all time high.
Playing into the ability of the ILS and alternative capital market to continue eating into traditional reinsurance market share is the amount of capital that has been trapped by lengthy claims settlement processes or any litigation that arises following the loss events.
Fitch particularly cites hurricane Harvey and flood losses as one area that could cause capital to be trapped for a longer duration. However, as that was one of the earlier events to occur and perhaps the one with the smaller amount of ILS exposure, due to the fact the loss was so focused on flooding, we’d suggest this may not be a particularly significant amount of the currently trapped or lost collateral total as more may be trapped due to aggregated losses, or from hurricane Irma.
Fitch cites estimates that the ILS market will lose $10 billion, following third-quarter 2017 catastrophe events, but that more will be lost for deployment purposes due to the collateral trapping at the January renewals.
“This ‘trapped capital’ will be unavailable until there is certainty on losses, and this is unlikely to be known in advance of 1/1 renewals,” Fitch explains.
But it is the appetite and willingness of alternative capital and ILS investors to trade forwards that matters, even if there is a little less capacity deployed by the space at the renewals.
As we said, recent capital raises appear to have successfully replaced lost capital and in some cases increased it for ILS managers, while new start-ups are successfully raising capital in many cases as well.
“It is unclear the degree to which alternative capital is inclined to deploy additional capacity to the market while considerable collateralised funds are unavailable,” Fitch continued, saying that ILS will, “Have a tremendous influence on pricing and program structure in the next round of renewals.”
Finally, Fitch Ratings also said that it expects reinsurance demand to rise, as a result of the losses, with companies likely to buy more aggregate protection.
Recent catastrophe bond launches, such as those from Covea and Validus, suggest that re/insurers may turn to the 144a securitised market to fulfill a portion of their increased desire for protection, which could result in another brisk year of catastrophe bond issuance ahead.
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