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$200bn event needed to hit reinsurance & ILS capital levels: Macquarie


Total reinsurance capital grew again at the end of 2015 as the lack of large loss events, growth of third-party capital and ILS resulted in an abundance of reinsurance capacity, meaning a $200 billion loss event may be required for any significant impact on rates to materialise, according to analysts at Macquarie

With the 2016 hurricane season fast approaching insurers, reinsurers, and insurance-linked securities (ILS) players will be keeping an eye on storm predictions following a record 11 years without a major landfalling U.S. hurricane.

Recently, Tropical Storm Risk (TSR), a leading forecaster of the Atlantic hurricane season updated its forecast to an above average level of activity, while the NOAA has forecast a near normal level of storm activity for the coming season.

The fact of the matter is that it only takes one major hurricane to make landfall on the U.S. coast for a substantial volume of economic and insured losses, with numerous industry analysts and experts in recent months citing that a significant loss event could be the catalyst for a turn in the current soft re/insurance landscape.

Underlined by an over abundance of capital from both traditional and alternative reinsurance providers, the ongoing benign loss environment, intense competition, and ultimately reduced rates, the global reinsurance market remains under significant pressure.

And now, analysts at Macquarie have noted the type of event that will likely be required in order for enough capital to leave the space, ultimately resulting in rate hikes and a shift in the softening landscape.

“A large loss of $150 – $200 billion could put pressure on the smaller players with outsized to equity but rates could likely go up for the market. Losses are not enough. Some cat losses occur but not enough to cause a serious dent in the capital position.

“We estimate a $200 billion event is necessary to impact the over abundance of capital,” said Macquarie analysts.

Analysts at Morgan Stanley also noted recently that a large loss event could impact pricing in the global reinsurance market, or that a surprising unmodelled event could also have a substantial on rates in the sector.

To get an idea of just how big of an event would be required to incur losses of this magnitude, hurricane Sandy, the largest insured loss event of 2012, resulted in an estimated cost to the market of $28.2 billion, according to Aon Benfield’s catastrophe modelling unit Impact Forecasting.

The over abundance of capital in the global reinsurance marketplace totals roughly $400 billion, with approximately $70 billion of this coming from alternative, or third-party reinsurance sources, according to a recent GC Securities report, says Macquarie.

However, estimates on both figures can vary, with reinsurance brokerage Willis Re stating that at the end of 2015 total reinsurance capital amounted to $427 billion, with $70 billion of this coming from alternative reinsurance providers.

Generally, however, most analysts and industry experts noted a decline in traditional reinsurance during 2015 that was offset by the continued expansion of third-party reinsurance capital, including catastrophe bonds, sidecars, and most notably collateralised reinsurance placements.

In line with other industry analysts, Macquarie notes the uncertainty that the glut of third-party capital investors will remain in the space, or pull-back following a large loss event, or series of sizeable events, as since ILS capital really started to have a meaningful influence on the space there hasn’t been a large event.

However, the increased maturity and sophistication of the ILS space has been well documented in recent times, and the general view is that investors are here the long-term.

“Our recent meeting with a reinsurance expert alluded to third-party capital stabilizing and these investors remaining for the long-term. He argued alternative capital could grow to approximately 20% of total capital by 2020,” said Macquarie.

Furthermore, it’s been reported that a wealth of third-party investors are waiting on the sidelines for the next large event to happen before they enter the space, so even when a large event does happen it might not be enough to cause significant disruption.

A $200 billion event would more than likely cause some disruption to the marketplace and remove some of the abundant of capital, ultimately leading to some rate increases across the reinsurance landscape.

However, with the ILS investor-base continuing to expand and the fact that others are sat on the sidelines, waiting to enter the space, it will be interesting to see how the marketplace reacts to the next large event, especially if one so severe, or several events in a short period time, to cause losses in the region of $200 billion.

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