Alternative reinsurance capital grew 12% to $72bn in 2015: Aon

Total global reinsurance capacity declined by 2% last year, standing at $565 billion at December 31^st 2015. However, alternative reinsurance capital continued to increase its share of the overall market during the period growing by 12% to $72 billion, according to reinsurance broker Aon Benfield.

Alternative reinsurance capital continued down its impressive growth path during 2015, increasing its share of the overall reinsurance market pie by a meaningful 12%, totalling an estimated $72 billion of the $565 billion global reinsurance industry capital-base, according to Aon Benfield’s latest Aggregate report.

Global reinsurance capital, split traditional and alternative - Source: Aon Benfield

Aon’s latest report on the global reinsurance landscape highlights the increasing acceptance and influence of alternative reinsurance capital, in the forms of catastrophe bonds, sidecar ventures, collateralized reinsurance placements, and other insurance-linked securities (ILS) structures backed by capital markets capacity.

The increase in alternative capital within the sector helped offset a 4% dip in traditional reinsurance capital during the twelve months of last year, which totalled an estimated $493 billion, “driven by the strengthening of the US dollar and the impact of rising interest rates on bond valuations,” said Aon.

Many primary insurers and traditional reinsurers endured a testing time in 2015 as the benign loss environment, weak investment returns, and ample capacity continued to drive a softening landscape, underlined by persistent rate declines across the majority of business lines.

In response to the softening landscape and resulting limits on profitability, more insurers and reinsurers during 2015 looked to centralise their reinsurance operations.

While this provided firms with a more holistic view of their risk profile and increased efficiency/cost reductions, ultimately, the trend resulted in a decline of ceded reinsurance, further contributing to the supply/demand imbalance that continues to engross the space.

Owing to the increased trend of centralised reinsurance buying and persistent market challenges, it’s not too surprising that Aon Benfield reports a decline in traditional reinsurance capacity during 2015.

The reinsurance broker explains that the growth in non-traditional reinsurance in 2015 is “reflected in robust levels of catastrophe bond issuance, further expansion of fully collateralized placements and growing utilization of ‘sidecar’ vehicles.”

Data from the Artemis Deal Directory shows that catastrophe bond issuance in 2015 remained strong after the record-breaking volume of risk brought to the market the previous year.

The catastrophe bond and ILS market actually finished 2015 with a staggering $25.96 billion of outstanding market volume, making it the third-highest issuance level ever recorded by Artemis in a single year, at $7.898 billion.

Interestingly, the 12% growth in alternative reinsurance capital during the 12 months of last year is in line with the combined growth in assets under management (AuM) of the 41 ILS managers and funds (that we have AuM data for) that we track on Artemis, via the Insurance Linked Securities (ILS) Managers & Funds Directory.

At the end of December 2015 the combined AuM of the ILS managers and funds totalled $61.16 billion, and has already increased to an impressive $63.23 billion at March 31^st 2016.

In the coming months alternative reinsurance capital is expected to find its way into new perils and regions, as insurers and reinsurers look to increase efficiency and partner with capital markets-backed capacity as a means of diversification and cost reduction.

The more alternative reinsurance capital grows its share of the overall reinsurance landscape the more its likely to be utilised across all areas of the risk transfer world, suggesting further growth in the coming months.

Furthermore, the establishment of in-house, dedicated third-party capital units among insurers and reinsurers’ is predicted to intensify as the longevity and usefulness of the ever-expanding features of the ILS space continues to grow in acceptance and understanding.

More and more firms are expected to utilise sidecar ventures and other structures, in order to access diversifying third-party reinsurance capacity, and the growth of the collateralized reinsurance sub-sector is also poised to continue through 2016.

Additionally the ILS fund manager market is innovating to originate and access risk in new ways, serving to disintermediate the market and the reinsurance renewal cycle, another trend that should ensure continued growth of the capital markets participation in reinsurance.

Combine this with the fact that during the first-quarter of 2016 the catastrophe bond and ILS market witnessed $2.215 billion of issuance, the highest amount ever recorded by Artemis in a Q1, and it’s likely that come year-end 2016 alternative reinsurance capital has again grown its contribution to the overall reinsurance market pie.