Alternative capital grows 9% in 2017 despite losses: Guy Carpenter

The amount of alternative or convergence capital in the global reinsurance market grew by 9% over the course of 2017 to reach a high of $82 billion, according to broker Guy Carpenter, as despite the major losses the ILS market continue to outpace the traditional reinsurers for growth.

The growth of 9% to reach $82 billion of alternative reinsurance capital includes the replacement of lost or trapped capital at the end of the year, in time for the key January renewals.

The fact that the ILS fund market and other collateralized reinsurance vehicles managed to replenish their capacity so quickly following the largest losses the sector had faced in its history, is testament to the mechanics of the ILS market, the attractiveness of insurance-linked returns to investors, and perhaps also the fact that global re/insurers are now reliant on the efficient protection and capacity that capital market investors provide.

While alternative capital grew 9%, the amount of traditional reinsurance capital in the market was flat for the year, according to Guy Carpenter, so overall dedicated global reinsurance capital, as measured by the broker along with A.M. Best, rose just 2% to $427 billion in 2017.

That means alternative and ILS capital now makes up more than 19% of total dedicated reinsurance capital, a particularly large and increasingly influential slice of the global marketplace, especially when you consider the smaller and more efficient business models that, in the main, manage and deploy it.

The reinsurance market was resilient at the January 1st renewals, according to Guy Carpenter, although the excess capital and interest from ILS investors has once again dampened rate increases.

Rate rises at the key 1/1 renewals were “generally moderate and pricing shifts focused on client-specific justification,” Guy Carpenter said.

“Despite substantial catastrophe losses in 2017, the market demonstrated significant resilience with no notable capital withdrawal and moderate price increases. Evolving market dynamics and innovative reinsurance solutions serve to mitigate significant loss events and protect industry capital and profitability,” commented David Priebe, Vice Chairman, Guy Carpenter.

“The reinsurance and capital markets responded favorability to those companies who were able to present quality data and well developed and executed loss mitigation strategies. These measures support companies’ ability to attain customized risk transfer solutions and maximum protection for their risk profiles,” Priebe continued.

The major losses of 2017 were not sufficient to dampen investor demand in allocating to alternative capital and insurance-linked securities (ILS), resulting in a disappointing renewal for many firms as rate increases failed to live up to expectations.

Guy Carpenter also said that its estimate of insurance industry losses for 2017 comes out at $113.5 billion, currently, excluding the losses suffered by the NFIP and accounting for some decreases in estimates that have been announced recently.

Overall Guy Carpenter’s analysis of the reinsurance market at year-end 2017 and into the renewals of 1/1 2018 highlights an industry that has demonstrated its resilience in the face of major losses, largely due to the ready availability of capital.

It is this capital availability that has enabled reinsurers to get through the major losses without suffering particularly large impacts to their own capital, it has helped them through retrocession, and it has helped buyers by dampening the old rate cycle of peaks and troughs, flattening it out to provide a more measured pricing environment at renewals.

Guy Carpenter explains, “The 2017 events were largely within model parameters, and overall industry capital did not decline. Assessment of the market response will continue through the spring, when many of the most heavily loss-impacted programs renew.”

Finally, the use of retrocession by reinsurance firms has helped to soften the impact of major losses, in which convergence and ILS capacity has had a big hand given the capital markets involvement in collateralized retro underwriting.

This “more aggressive” use of retrocession by reinsurers, as Guy Carpenter terms it, has helped them to avoid as big a hit to their profitability as it could have been, demonstrating the fact that alternative capital is integral to the reinsurance market business model these days.

Guy Carpenter notes that the 10-year weighted average return on average equity (ROAE) of its Guy Carpenter Global Reinsurance Composite is 8.1%, despite this period including two of the three costliest catastrophe years on record.

The resilience of the reinsurance market has clearly been demonstrated, but when looking at why the market has come through its losses and buyers have not been hit with massive price rises there is one factor that has obviously helped and that is the growth of alternative capital and ILS.

Following the January renewals and including updates on assets under management at many ILS fund managers, Artemis’ Insurance Linked Securities (ILS) Investment Managers & Funds Directory has risen by more than $6 billion since September, to now stand at $86.6 billion.