Alternative capital’s importance evident in loss payments: Swiss Re

Alternative reinsurance capital is playing an increasingly important role in the global re/insurance market, according to Swiss Re, which recognises that it has helped to curb volatility in the marketplace and is paying an increasing share of global losses.

2017’s U.S. hurricanes were the first time that alternative reinsurance capital and insurance-linked securities (ILS) structures and funds made a significant contribution to loss payments.

In fact, Swiss Re estimates that as much as 25% to 30% of the loss payments for the 2017 hurricanes, Harvey, Irma and Maria, were ultimately backed by alternative capacity, rather than traditional reinsurance capital.

While the catastrophe losses of 2017 and 2018 were shared out between primary insurers active in the affected areas and the global reinsurance industry, Swiss Re says that for the first time alternative capital “also made a significant contribution to the loss payments.”

As the growth of the ILS market has continued, to now reach as much as 25% of global property catastrophe capacity, Swiss Re’s figure, the sector is large enough and so broadly deployed that any major catastrophe event in a peak zone is likely to see a decent percentage of its claims falling to ILS funds and collateralized reinsurance vehicles.

This is of course what ILS was originally designed for and intended to do.

To take on a share of the peak catastrophe exposures, those the traditional industry could not bear alone, but also those which would otherwise be concentrated among traditional reinsurers, ultimately driving volatility in the industry in terms of capital supply and subsequently in terms of pricing.

The ILS market has now reached that level of scale and promises to keep expanding in the future, to help take on these peak exposures, assist reinsurers in better managing their tail risks, flattening volatility in pricing, and offering routes to new capital that can be secured and deployed much more quickly and efficiently.

As RenaissanceRe’s Aditya Dutt said in a speech in London recently, ILS and alternative capital is now the first avenue for raising capacity after major catastrophe losses strike.

While the last two years of losses have been easily absorbed by the well-capitalised traditional reinsurance market, demonstrating the “utility of the industry as a main line of defence in building resilience,” Swiss Re said.

Alternative capital is a new source of capacity and has proven its value in 2017 and 2018, as many of the traditional reinsurers may have struggled following two consecutive years when global catastrophe losses aggregated to a new record high.

Had the 25% to 30% of hurricane losses fallen to the balance-sheets of the traditional side of the industry, we would likely be looking at a much more volatile renewal rate environment, with larger spikes in pricing, contracted capacity, perhaps even with reinsurers needing to raise capital to trade forwards.

We’d also likely have seen more start-up activity, something that is now restricted to just a handful of more specialist focused, or teams that have significant pedigree in the industry already (such as Stephen Catlin’s recently launched Convex reinsurance start-up).

Alternative capital has the added benefit due to “the increased ease at which capital can enter the market,” Swiss Re explains.

Which, as a result, enables the market to trade forwards with greater stability, due to the fact it will “help curb the volatility of the reinsurance underwriting cycle, making for an overall more stable insurance market.”

In taking its share of global catastrophe reinsurance losses, the ILS market and alternative capital has clearly demonstrated its utility and usefulness, underlining the benefits it brings to the global market through efficiency, flexibility, ease of capital raising and speed of deployment.

This role is only likely to increase in important as the world’s exposure to natural disasters, weather and climate related risks increase.

The role of ILS may also increase further in importance as the capital markets expand their remit to underwrite broader classes of business that exhibit similar peak exposure and have the potential to threaten the traditional re/insurance industry’s capital base.

The key to its future is in ensuring risk commensurate underwriting and returns are secured, to provide the investors backing this growing market with long-term returns that remain attractive across multiple years in the market cycle.

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