“Significant” volume of ILS capital waiting on the sidelines: Peel Hunt

A significant volume of alternative reinsurance capacity is waiting on the sidelines, ready to flood the specialist Lloyd’s of London insurance and reinsurance marketplace after the next major loss, according to analysts at Peel Hunt.

Citing numbers from insurance and reinsurance brokerage Aon, Peel Hunt states that the volume of alternative reinsurance capital reached $78 billion in 2016, outpacing the growth of traditional capital and contributed an unchanged 21% of total, dedicated reinsurance capital.

Since the key January 1st 2017 renewal season it’s been reported by a number of industry analysts and participants that the entry of alternative, or insurance-linked securities (ILS) capital in the reinsurance industry has slowed in recent times, driven by the softened state of the marketplace and resulting pressure on rates.

But despite a notable slowdown of ILS capacity in the Lloyd’s market and the broader insurance and reinsurance industry at 1/1 2017, “What we anecdotally sense, is that a significant amount of capital is sitting on the side lines waiting to be deployed post a major event,” says Peel Hunt.

Echoing the thoughts of re/insurance market analysts in 2015 and 2016, Peel Hunt suggests that the current dynamics of the marketplace – which is overcapitalised resulting in a supply/demand imbalance – and the persistent appetite of capital markets investors to assume insurance and reinsurance-linked investments, is contributing to continued rate softening.

“The ongoing development of Alternative Capital structures will cap a cycle turn and keep the market soft in our view,” says Peel Hunt.

This is something we’ve discussed at Artemis before, and it’s a topic that has been prominent during the soft market cycle and since the influx of ILS really started to influence pricing in the reinsurance industry.

With so much capital in the marketplace, seemingly fighting for a shrinking market size, even if a substantial volume of capital was removed from the space owing to a large catastrophe event, for example, the volume of alternative capacity willing and able to take advantage of market dynamics could limit any post-event price surge – which suggests a flattening of the market cycle moving forward.

“Given Alternative Capital can easily be (re)deployed post event, we conclude that there is little to suggest the soft market will turn anytime soon, even after a sizeable event,” says Peel Hunt.

Specific to the Lloyd’s market, but also evident throughout the global reinsurance industry, Peel Hunt notes that collateralised reinsurance agreements continue to outpace catastrophe bond issuance, in what are the two largest sub-sectors of the ILS space.

“Collateralized Re structures are still being launched partly through the Lloyd’s market backed by third party investors and offsetting a reduction in Cat Bonds.

“Alternative fund structures continue to be launched, albeit with more balanced investment risks and diversified underwriting strategies. Hence, there is no sign that capacity is exiting the market, keeping rates soft,” explains Peel Hunt.