Alternative capital hits record $78bn, but growth slows: Aon

Alternative capital in the insurance and reinsurance market and across the range of insurance-linked securities (ILS) products reached a new high at $78 billion at the end of the third-quarter of 2016, according to Aon Benfield.

But while continuing to break records, the growth of alternative reinsurance capital has slowed dramatically, with a 9.6% increase during the first nine months of 2016 the slowest recorded growth in five years, according to the reinsurance brokers latest market outlook report.

Reinsurance capital as a whole reached a new high at $595 billion, an increase of 5.3% over the nine months, with traditional reinsurance capital expanding 4.7% to $517 billion, but alternative capital outpaced it again, growing 9.6% to the $78 billion.

Change in global reinsurance and alternative capital

Reaching a new peak, reinsurance capacity “continues to outpace the growth of reinsurance demand despite insurers continued efforts to optimize their view of reinsurance as capital and expand into growing lines of business and new innovation,” Aon Benfield explains in its latest reinsurance market outlook report.

The fact that alternative capital for ILS and collateralised reinsurance has grown at a slower pace is notable.

Aon Benfield explains; “This result further suggest that traditional capacity is using all the tools at its disposal in order to stave off market share growth from alternative capital.”

This is true, but as well as traditional capacity continuing to fight hard for business, reduce its rates, expand terms and bundle in coverages such as terror, on the property catastrophe programs where alternative and ILS capital is so focused, the slowdown in alternative capital growth is also a reflection of the state of the market.

ILS fund managers have been among the first to pull-back from underpriced business, with their discipline cited widely at renewals in 2016. In fact, in some regions of the world, ILS fund managers have been cutting their shares in programs as the large, traditional reinsurers exert their ability to discount for diversification in order to underwrite large chunks of property catastrophe business at rates approaching expected loss.

When there is little margin in some areas of reinsurance it is no surprise that ILS capital growth has slowed. With investors and minimum return requirements to satisfy, as well as a less diversified portfolio, ILS fund managers have mostly been very careful about where they have grown over the last nine months, resulting in this slow down.

While there has been some increase in demand for reinsurance, it is in pockets and isolated to a few regions and lines of business. At the key January 2017 reinsurance renewals some insurers in the U.S. and Europe did secure additional property catastrophe capacity, which will likely have benefited some of the ILS market and its funds.

Aon Benfield notes that the increased appetite among some ceding insurers for more property catastrophe coverage was either due to their ability to secure more attractive terms and conditions, or in order to meet regulatory and rating agency requirements.

There was also some additional demand for multi-year reinsurance cover, which again likely will have benefited the ILS market, as insurers looked to increase the percentage of their programs providing multi-year cover, while reinsurers looked to lock in their participation.

With both traditional and alternative reinsurance capital reaching new peaks at the end of September 2016 the market maintains “ample capacity” to meet “expected reinsurance demand” Aon Benfield believes.

Looking ahead to 2017, the broker does note that factors such as a pick-up in mergers & acquisitions (M&A) and the potential for interest rate increases could affect global reinsurance capital, but their expectation is that any changes due to these factors would be slow to manifest.

As a result, “Enough excess capital remains in the market to continue the trend for better terms and conditions for insurers seen at January 2017,” Aon Benfield believes.

That suggests that as well as better terms and conditions, we could also see continued price declines at the more moderated rate seen in January renewals.

With alternative reinsurance capital reaching another record at $78 billion at the end of Q3 2016, so likely sitting at $80 billion or higher as of the start of 2017, the ILS market and other alternative vehicles now represent over 13% of global reinsurance capital, according to Aon’s figures.

It will be interesting to see how much growth can be achieved in 2017, a year when almost $8 billion of catastrophe bonds will mature.

But cat bond rates continue to be very competitive, making renewing maturing deals more likely and attracting new sponsors to the ILS market.

At the same time, there is evidence that ILS funds are working on many initiatives to source risk more directly and the increasing number of private ILS or cat bond deals, as well as new reinsurance sidecar launches, all suggests that investor interest remains strong and growth is likely once again.

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