Alternative capital more challenging for reinsurers than primary insurers: S&P


Right now, the challenges posed by alternative reinsurance capital, which has entered the market from external third-party investors, are much greater for reinsurers than for primary insurers, said ratings agency Standard & Poor’s in a report on global multiline insurers.

Alternative reinsurance capital which comes in many forms, from insurance-linked securities such as catastrophe bonds, to reinsurance-linked investment funds, to collateralized reinsurance vehicles, sidecars and other derivative type instruments such as industry-loss warranties, has been flowing into the reinsurance market in growing volume.

These inflows of alternative capital, a trend which began in earnest via ILS over the last decade, have created a newly competitive marketplace, where cost-of-capital is king and the ability of new, leaner ILS instruments and players to underwrite reinsurance capacity at lower cost has put pressure on reinsurance pricing.

In its report, Standard & Poor’s said that the influence of alternative capital is most evident in structured property-catastrophe transactions at the moment. While these new products and new capital providers have impacted property catastrophe reinsurers hardest and are now widening their ambitions to other lines of reinsurance business, they have not as yet significantly affected the global multiline insurers.

Global multiline insurers are similarly well-capitalised to the major reinsurers, but as yet S&P does not see alternative capital having any impact on the major global multiline insurers pricing power or competitive positions.

S&P believe that alternative capital poses greater challenges for reinsurers than primary insurers. In fact it feels that at the moment alternative capital is perhaps positive for primary insurers due to the increased range of options to transfer risk.

Clearly the reduced pricing of property catastrophe reinsurance is another plus for primary insurers that has come from the recent inflows of alternative capital.

So, for the moment insurers seem to be relatively immune to any negative impacts of alternative reinsurance capital./ The question has to be whether that will last and what will happen if, as some suggest, we see another $100 billion of alternative capital enter the reinsurance marketplace in years to come?

Some observers have commented that major global reinsurers may begin to look to providing insurance in future, as they look to new opportunities to make up for any loss of revenue created by the competition from alternative capital and ILS. If that happens there will surely be a negative impact on other global multiline insurers, from increased competition.

Another possible factor is if the pricing cycle has been altered, or smoothed, by the influence of alternative capital, then will the reinsurance price decline be forced through to insurance products reducing the profit margin that multiline insurers make?

For the moment the outlook for these insurers remains stable, said S&P, but we feel that could change over time if the trends we’ve witnessed in the last year continue and alternative capital continues to take a larger role in the reinsurance, and perhaps eventually insurance, marketplace.

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