A quarter of insurance and reinsurance companies say that they will use the capital markets to an increasing degree in 2017, according to data from a survey of 107 re/insurance professionals undertaken by Guy Carpenter.
The capital markets are an increasingly prevalent part of most insurers or reinsurers capital towers, with reinsurance capacity provided by capital markets investors one of the fastest growing types of protection in the marketplace in recent years.
With insurance-linked securities (ILS) capital, invested into directly collateralised reinsurance, sidecar vehicles or instruments such as catastrophe bonds and industry loss warranties (ILW’s), now amounting to somewhere between $70 billion and $75 billion of reinsurance capital, it appears that the growth seen in recent years is likely to continue.
Reinsurance broker Guy Carpenter polled 107 executives at the recent the 2016 annual meeting of the Property Casualty Insurers Association of America and found that when asked which capital sources they would be utilising more of in 2017, while the majority said traditional reinsurance, the second highest response was the capital markets.
As you can see from the chart above, 52% of re/insurance executives polled said that they would use more traditional reinsurance in 2017. 25% said that they expect to use the capital markets more in 2017, while 18% said balance-sheet capital would be the preference and just 5% internal reinsurance vehicles.
Given the strength of both insurance and reinsurance company balance-sheets right now and the prevalence of excess capital, which has resulted in companies returning capital to their shareholders, you may have thought that the capital markets would not be a strong target in 2017 for re/insurers.
But perhaps the attrition of multiple catastrophe and severe weather losses in 2016 may have resulted in a need for more reinsurance capital, with the capital markets destined to at least take a share of any increased reinsurance demand.
Additionally, it’s perhaps surprising that internal reinsurance vehicles haven’t become more popular, given how effective they are proving for some re/insurers to be able to retail more margin from their underwritten business.
Of course most of the internal reinsurance vehicles set up in recent years have involved being capitalised by third-party investors anyway, with many the same kind of end-investor as we see in the ILS market. So any growth in internal reinsurance structures could also result in greater reliance on capital market investors.
It is hard to think of well-capitalised re/insurers foreseeing a greater use of the capital markets for financing in 2017, as that is clearly not required except perhaps to finance M&A or specific growth options. So it seems likely that the majority of the respondents citing an expectation of using the capital markets more will have been thinking about risk transfer, hedging and ultimately collateralised reinsurance or ILS.
Could be a positive signal for the ILS market for 2017.