The insurance and reinsurance industry faces increasing interest and a growing amount of capital inflow from sources outside of the industry. This alternative capital, while having a marked impact on areas of reinsurance, is not yet felt widely by primary insurers.
Participants in insurance and reinsurance rating agency A.M. Best’s latest market survey of the insurance sector were asked whether they felt the impact of alternative capital within their businesses.
From the amount of noise there is surrounding alternative reinsurance capital and ILS across the industry press, beyond just those who specialise in this area like Artemis, you’d assume that everyone would be on the defensive immediately when asked such a question.
However, A.M. Best reports that only 22% of the insurers surveyed said that their businesses had been impacted by the entry and growth of alternative capital in re/insurance.
The same survey also found that only 3% of respondents had actually used insurance-linked securities (ILS) as part of their risk transfer and reinsurance, which perhaps shows that knowledge of products such as catastrophe bonds still has room to grow.
But, while alternative capital and ILS may not have been widely used by the respondents, it is acknowledged to be having an impact by more of them.
This shows that awareness of ILS products and the growing alternative capital pool is larger than its uptake, perhaps suggesting that there is a continued education and sales job required to grow uptake of ILS and cat bonds.
A.M. Best reports that 78% of respondents said that they do not feel the impact of alternative capital in their businesses. That’s not surprising given the respondents are largely on the insurance side.
It’s another interesting stat which will likely change over the coming years. Especially now that ILS players are increasingly seeking to get closer to the risk, through provision of risk capital to program service providers, MGA’s and through fronting.
As ILS capital begins to support more of the insurance and reinsurance value chain the impact to primary insurance players will grow. ILS capital will provide them opportunity, by providing efficient risk capital with which they can model their own capital base and better protect themselves. However it will also increasingly seek to channel the risk directly to itself, so the competitive impact will likely be felt more greatly in time.
16% of the respondents to A.M. Best’s survey said that they felt alternative capital has impacted them in their businesses more than they had expected. At the same time just 6% said it had affected them less than they expected.
That suggests that once the impact of alternative reinsurance capital is felt by an insurer, the magnitude of the impact will likely be greater than it had perhaps expected, before the effects began to be felt.
As the ILS market continues to grow and becomes an increasingly widely used source of risk transfer and reinsurance capital by these insurers, as well as being used as a capital tool to enable growth and expansion as we are beginning to see today, the impact to their businesses will grow in magnitude.
Alternative capital is destined to have a widely felt impact across the insurance and reinsurance industry, as more and more companies find ways to leverage it and bring it within their capital models. As a result it will be fascinating to see how these statistics change over the next few years.