Slower third-party capital growth in reinsurance is healthy: A.M. Best

The slowdown in growth of third-party or ILS capital in reinsurance is “a healthy response” to the continued pressure faced in the global reinsurance market, according to rating agency A.M. Best.

The global reinsurance market continues to face its challenges, with both market and macro-economic forces at work and expected to “mold the landscape” over the near-term, according to A.M. Best.

Results remain reasonable, with catastrophe losses still manageable, reserve releases still favourable and capital management rife in the sector, but competition is expected to remain high and even though the bottom of the soft market is near, reinsurance margins are set to remain under pressure.

One positive that A.M. Best notes in a recent report on the reinsurance sectors challenges is the discipline seen among ILS funds and managers, particularly the fact that third-party capital inflows in the sector have slowed.

“The speed of capital market capacity entering the market seems to have slowed compared to prior years and some collateralized markets have held capacity flat, unable to find suitable opportunities,” the rating agency explains, adding that “In A.M. Best’s opinion, this is a healthy response to the current market environment.”

By all accounts reinsurance capital remains at or near record highs and the market is overcapitalised, leaving traditional reinsurers with the problem of what to do with excess capital.

The ILS market has slowed its rate of growth, and while convergence capital continues to enter collateralised reinsurance vehicles, ILS funds and the catastrophe bond sector, it is at a reduced rate compared to previous years.

This does help to alleviate some of the pressure felt by traditional players and by ILS funds, but overall the sector remains awash with capacity meaning rate pressure will be unlikely to dissipate.

A.M. Best is not the first to highlight the fact that ILS managers have been disciplined in not tempering their new inflows to meet opportunities available in the market, however the rating agency also hints at future opportunities for ILS investors.

As traditional reinsurers are expected to become increasingly capital agnostic, with many actively promoting their ability to match risk with the right capital, there is an expectation that reinsurers use of third-party capital and ILS vehicles will continue to grow.

Ultimately this could mean ILS capital grows while traditional capacity stagnates, with the traditional market able to leverage efficient capital markets funding for underwriting the risks which no longer meet their balance-sheet return requirements.

Again, this would be a healthy response from the traditional side, to open themselves up to partnering more with the capital markets in order to at least make fee income from underwriting risks which otherwise the ILS market could take for itself.

Of course that should also ensure ongoing competition for risk and pressure on pricing as well, meaning the overall outlook for reinsurance market conditions is one that for the moment won’t change significantly.