Alternative capital to continue outpacing traditional reinsurance: S&P

Global financial services ratings agency, Standard & Poor’s (S&P), expects the growth of alternative reinsurance capital to outpace growth in the traditional market as it looks to expand outside of the property catastrophe space and earnings headwinds persist.

Over the last five years or so alternative, or non-traditional reinsurance has grown substantially, in terms of size, remit, and also understanding by both the investor base and traditional insurance and reinsurance industries of the world.

Reaching a new market high of $86 billion at the end of March, 2017, the volume of alternative capital continues to claim an increasingly larger slice of the overall reinsurance market pie, and the sub-sector’s growth has outpaced that seen in the traditional market for some time now. And S&P expects this growth to continue.

The $86 billion recorded as of the end of March, 2017, represents 14.2% of the total volume of reinsurance capital in the industry, which is a huge increase from the 5.4% recorded at the end of 2007, according to a report from reinsurance broker, Aon Benfield.

“Alternative capital growth will likely continue to outpace traditional forms, gaining more market share of total global reinsurance capital,” says S&P, in its recently published Global P/C Reinsurers report.

But while the market continues to expand, its entry into the global reinsurance industry has slowed in more recent times, likely in response to the softening landscape and intense competition that is challenging the operating performance of all in the risk transfer space.

But despite the noted slowdown, S&P feels confident that alternative capital will continue to evolve as investors and sponsors find new ways to transfer exposures, highlighting a number of areas that might present growth opportunities for the sector.

“Some areas for potential growth include an increasing diversification of catastrophe risk (more exposure to nonpeak territories), frequency risk, the pooling of smaller cedents for purchasing, the growing use of indemnity triggers, and lines of business other than property catastrophe risk, including flood, terrorism, cyber, and morbidity risk,” says S&P.

Furthermore, S&P states that the development and maturity of international insurance markets may also create opportunities for alternative capital, or insurance-linked securities (ILS) as new sources of financing and new, diversifying peril regions.

Ultimately, S&P expects growth of alternative capital to continue to outpace that seen in the traditional marketplace. However, with growth increasingly difficult to come by for both traditional and alternative players as the soft cycle persists, ILS participants might need to look to innovation and the entry into new perils and regions in order to maintain its current, impressive growth trend.