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Alternative reinsurance capital growth outstrips traditional: Aon Benfield


The growth of alternative reinsurance capital has outstripped global traditional reinsurance capital in 2015, reaching $69 billion at the end of the third-quarter, now doubling the property catastrophe reinsurance capacity of the market, according to Aon Benfield.

Aon BenfieldGlobal reinsurance capital remained unchanged at $565 billion at the end of Q3 2015, according to reinsurance broker Aon Benfield’s latest market outlook report. That represents a contraction of the overall market, down 2% from the end of 2014, but over the same period alternative capital and ILS capacity from capital market investors continued to expand.

Change in global reinsurance capital

Change in global reinsurance capital

Aon Benfield reports that “the value proposition of reinsurance improved further” at the January 2016 renewals, with insurance companies able to incorporate reinsurance into their underwriting capital structures with “modestly better pricing, terms and conditions.”

For the 2016 renewal it has been important for reinsurance firms to ensure that they can meet demand growth from diversifying sources, Aon Benfield said, with reinsurers investing in skills and processes to meet an increase in reinsurance demand from its clients.

At the January renewal there was further evidence of coverage enhancements being offered, as reinsurance markets continued to “broaden the spectrum of coverage and type of placements they will support,” Aon Benfield said.

This continues to be a response to the competition coming both from within the traditional reinsurance market, as well as increasingly from alternative capital and ILS.

The renewals saw further improvements in reinstatement terms, more multi-year reinsurance coverage being made available, while reinsurers worked with cedents to develop unique structures and to better support new insurance strategies and lines of business, the report continues.

Looking ahead, Aon Benfield said that it expects that the April 1st 2016 renewals will be positive for clients, with insurers likely to find further improvements in pricing terms and conditions which the broker believes will be similar to those achieved at January 1st 2016.

That doesn’t bode so well for the traditional reinsurance market, which is approaching its cost-of-capital on many underwriting lines. That should push further use of facilities, follow-form arrangements and also adoption of alternative capital, as reinsurers increasingly need to find ways to increase the efficiency of their underwriting capacity.

This trend is something that Aon Benfield expect will continue, as the reinsurance market is expected to remain awash with capacity, both due to reinsurers strong capital positions and the ongoing pressure from alternative markets and ILS.

Alternative reinsurance capital grew by 8% since the start of the year, by the end of the third-quarter of 2015, and this “remains impactful to the overall market for risk transfer,” Aon Benfield said.

Growth of alternative reinsurance capital

Growth of alternative reinsurance capital, split by cat bonds, collateralized reinsurance and other ILS structures

The ongoing growth of alternative reinsurance capital sees increasing numbers of traditional reinsurers incorporating alternative capital into their underwriting capital structures, enabling them to further enhance offerings to their primary insurer customers, the broker explained.

The slow down in growth of alternative reinsurance capital and ILS is a clear reflection of the discipline being shown by insurance-linked securities (ILS) investors and ILS fund managers, as documented in our piece from earlier today.

As a result of the continued growth of alternative capital, while overall traditional reinsurance capital remained static, the percentage of global reinsurance capital provided by ILS and alternative markets has now increased to 12%.

That reflects the growing importance of the large ILS funds as providers of collateralized reinsurance capacity, which is enabling ILS managers to become more influential during renewals and better able to negotiate terms and conditions on programs.

Aon Benfield’s figures show a slight contraction in catastrophe bond risk capital outstanding at the end of Q3 2015 (for the latest figures download our new report with full-year 2015 data here) but overall alternative capital growth was driven by collateralized reinsurance and sidecar market expansion.

Collateralized reinsurance continued its growth trend, increasing by over 10% to provide $32.8 billion, or nearly 50% of the overall alternative market reinsurance capacity. This percentage has likely grown further, perhaps to over 50% of alternative capital by the end of 2015.

Reinsurance sidecar activity was much stronger in 2015, with capacity provided by sidecar vehicles increasing the most, up over 30% by the end of Q3 2015 at $8.5 billion of capital, according to Aon Benfield’s data.

Use of industry loss warranties (ILW’s) increased slightly to $4 billion, reflecting a greater use of industry loss triggers for retrocessional purposes. ILS fund managers have themselves been greater users of ILW’s in 2015, as they sought to remove peak exposures from their portfolios, which may have driven some of this increase.

Looking ahead, Aon Benfield expects that alternative capital and ILS will continue to grow, and the broker says that; “Barring a significant shift in supply and demand dynamics, we maintain our estimate that alternative capital will reach USD120 billion to USD150 billion by 2018.”

For the market to reach that level of capital, which would still require at least 74% growth to go from the $69 billion Aon Benfield recorded at the end of Q3 2015, to the $120 billion in two years time, a rapid expansion of ILS will be required.

To reach the $120 billion target, ILS and alternative reinsurance capital is going to have to gain more ground against traditional reinsurance capacity, so we are likely to see alternative capital continue to outstrip traditional capital growth, to become an increasingly influential piece of the market in years to come.

Read all our reinsurance renewals news and analysis here.

Also read:

Q4 2015 Cat Bond & ILS Report: Outright market growth continues.

ILS investment case remains strong, despite lower returns: Mercer.

Diversification and growth expected for cat bonds & ILS in 2016.

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