Alternative sources of reinsurance capital, largely from ILS funds and other collateralized markets, is increasing its market share in commercial insurance, particularly in catastrophe exposed property space where rates are declining so far that traditional insurers are starting to reduce their risk appetites, according to Moody’s.
The effects of growing third-party reinsurance capital are being felt increasingly widely, with many reinsurance lines now pressured by ILS expansion and now the primary market feeling pressured as well.
Analysts at rating agency Moody’s Investors Service see this pressure being most felt in commercial property lines of business now, as rates slide across much of the commercial P&C sector and insurers anticipate an overall 1.5% decrease in pricing across 2017.
Blamed for the declining pricing are the usual factors, the same ones that have been impacting reinsurance pricing for the last four or five years; abundant capacity, relatively low catastrophe losses, favorable reinsurance pricing and the availability of enhanced reinsurance terms.
But Moody’s also explicitly cites the growing market share of alternative capital in commercial property insurance markets as another factor here, adding to the pressure on commercial property rates as ILS funds and other capital market capacity providers look to enhance margins by getting closer to the source of risk.
ILS funds and other third-party capital backed players are increasingly looking to commercial property, excess and surplus lines property and even homeowners property, especially in regions where catastrophe or severe weather makes up the bulk of the exposure.
Often working alongside or through traditional re/insurance market constructs, such as rated fronting paper, managing general agencies (MGA’s), Lloyd’s of London syndicates, broker facilities, or partnerships with traditional firms, the ILS market and its investors is increasingly taking on these catastrophe exposed primary property risks.
By putting collateralized reinsurance capacity directly behind portfolios of property insurance risk, ILS fund managers can access risk outside of the traditional renewal cycle, take some intermediation out of the equation, and benefit from an overall higher margin on the business underwritten.
From a portfolio theory angle, having the ultimate control over the policies in the risk portfolios that ILS capacity is backing can also benefit the managers, giving them more control over exposures than they perhaps have when assuming portfolios underwritten by others in reinsurance transactions.
As a result of this growing trend, Moody’s explains that; “Insurers that write catastrophe-exposed commercial property lines say risk appetite has declined this year as business falls below profitability targets and alternative capital providers increase market share.”
The rating agency says that; “Increased competition from reinsurers and alternative capital providers entering the primary insurance space, particularly for shared and layered programs.”
So, the pressure of capacity and the efficiency, or lower-cost, of the capital markets is beginning to take the margins available on commercial property insurance down to levels where some primary players are reducing their risk appetites for the business, according to Moody’s.
As ILS players increasingly look to this sector and those already there ramp up the programs and facilities they are working with, we can expect the pressure on commercial property insurance, particularly catastrophe exposed, to increase even further.
How long it will be until some traditional re/insurers are forced to exit the sector, as ILS weighs on it and of course the major global reinsurance firms also target this space, remains to be seen.
But they cannot absorb lower margins forever and the catastrophe exposed commercial property line could find the capital markets taking a much larger market share in years to come.