Swiss Re Insurance-Linked Fund Management

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Alternative capital to increase by up to 10% over next few years: Swiss Re’s Haegeli


In spite of an expected decline by the end of 2020, the volume of alternative capital in the global reinsurance market is projected to increase by five to 10 percent over the coming years, according to Jérôme Jean Haegeli, Chief Economist at reinsurance giant Swiss Re.

jerome-haegeli-swiss-reDuring a discussion with Artemis around the launch of the reinsurer’s latest sigma publication, Haegeli explained that for the capital markets, recent developments have been particularly interesting.

“The alternative capital market segment is experiencing a flight to quality, partially away from collateralized reinsurance to cat bonds and sidecars. Nevertheless, collateralised reinsurance will remain the largest segment this year, and very likely next,” he said.

On the back of a 7% decline in 2019, Haegeli explained that Swiss Re is expecting the level of available, alternative reinsurance capital to fall by around 2% by the end of this year.

However, going forward, the company expects the market to remain steady, but continue to increase in size.

As shown by our Artemis Deal Directory, so far in 2020, catastrophe bond and related insurance-linked securities (ILS) issuance has remained strong in spite of the impacts of the ongoing COVID-19 pandemic on financial markets.

In fact, in terms of the number of deals issued, Artemis’ data shows that 2020 is already a record year, and it looks likely that issuance volumes will also reach new heights by year-end.

Of course, a substantial amount of 2020 issuance covers mortgage insurance risks, but importantly, there’s also been more than 50 catastrophe risk-focused deals this year, which is promising in light of recent losses and there’s a strong chance we’ll see a record for pure catastrophe bond issuance in 2020 as well.

“Let’s not forget investors have had bad experiences and unexpected losses since 2017. There was loss creep for certain large nat cat events. I mention this because it explains why there hasn’t been an inflow into the alternative capital space in 2020. While corporate credit spreads are close to record low, you haven’t seen that large inflow,” said Haegeli.

Undoubtedly, the loss experience of recent years served to raise investor caution and across the spectrum of alternative vehicles, from collateralised reinsurance to cat bonds, ILWs and sidecars, market sentiment suggests an overall decline at year-end.

Although, this dip in the level of alternative reinsurance capital is expected to be short-lived and as noted by Haegeli, could reach the heights witnessed back in 2018 over the next few years.

Furthermore, the developments taking place across the alternative space are happening alongside the hardening of the reinsurance market ahead of the key, upcoming January 1st, 2021 renewals season.

While it remains to be seen what the trapped capital issue looks like come 1/1, how constrained the retro market is and ultimately, how influential third-party capital will be, Haegeli told Artemis that the recent positive rate trend will persist.

“I would expect positive price momentum to continue, in terms of alternative capital, as well as cat bonds, obviously. And, this is in line with the general trend seen in the primary commercial insurance and reinsurance sector,” he concluded.

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