28% of reinsurance buyers expect to increase alternative capital use in 2027: Moody’s

For the insurance-linked securities (ILS) market, one of the most promising findings of Moody’s Ratings annual survey of reinsurance buyers is that 28% of respondents said they anticipate increased use of alternative capital sources in 2027.

At a time when the ILS market has grown strongly and catastrophe bond issuance has soared, while the routes to access differentiated capital sources are proliferating and diversifying in themselves, this is a particularly strong signal for 2027.

It might imply buyers see significant value in alternative capital at this stage of the cycle, in allowing them to lock-in mostly longer-duration reinsurance and retrocession covers in structured formats.

The ongoing shift towards alternative capital solutions is based on more than price. In our experience, cedents greatly value the ability to stagger maturities of catastrophe bond coverage, lock-in differentiated capital over a multi-year term and explore efficient capital partnerships more directly with ILS investors.

That has all helped to drive growth of the ILS market in recent years and it seems the demand, from the protection side, is set to remain strong in 2027.

Moody’s Ratings commented, “Even as reinsurance market conditions become more competitive, interest in alternative capital is growing. Insurers are using ILS alongside traditional reinsurance to diversify capacity sources, secure multiyear protection and improve capital management.

“Among respondents, 28% expect to increase their use of alternative capital in 2027, while the remainder expect it to remain unchanged.”

The rating agency also asks buyers whether they have a preference for specific types of alternative capital structures and protection.

Interestingly, this year’s survey sees all structural options scoring more highly than they did in the prior year, as the chart below shows. This is unusual, as in most years at least a couple of options see a decline.

Mood’s said, “Catastrophe bonds remain the most popular option, preferred by 83% of survey respondents, which tallies with strong catastrophe bond issuance over the past year. Respondents also have a favorable view of collateralized reinsurance, reflecting attractive pricing and counterparty diversification. A smaller proportion of surveyed insurers expressed interest in using sidecars, ILS funds or other forms of alternative capital.”

Of course, ILS funds predominantly invest in cat bonds or provide collateralized reinsurance solutions to cedents, so it’s a little confusing the way this is included. But, positively, this is the highest sentiment on the ILS fund option for a few years, which bodes well for managers.

It’s perhaps surprising to see reinsurance sidecars so flat, given the growth of that segment of the market. As Aon reported recently, sidecar capital is now estimated at around US $23 billion.

It’s also encouraging to see collateralized reinsurance rated so highly, as the current stage of the market cycle suits deployment in that form and there could be growth and capital raising opportunities for ILS managers as a result.