Alternative reinsurance capital hits $66bn, outpaces traditional: Aon Benfield

Alternative reinsurance capital, so third-party investor funding allocated to catastrophe bonds, collateralized reinsurance, sidecars and other insurance-linked securities (ILS), grew by more than 3% in the first-quarter to $66 billion, outpacing total reinsurance capital growth.

As the capital markets increase their direct participation in the global reinsurance market, broker Aon Benfield says that alternative capital and ILS grew faster in Q1 2015 than the overall total amount of capital available in the reinsurance market.

Alternative reinsurance capital grew by over 3% to reach an estimated $66 billion at the end of March 2015. Once again collateralized reinsurance drove much of this growth, along with sidecars, while catastrophe bond risk capital shrank a little, due to high-levels of maturing cat bonds in the quarter.

Alternative reinsurance capital grows 3% in Q1 2015 to $66 billion - Source: Aon Securities

Meanwhile global reinsurer capital as a whole only managed to grow by 1% during the first-quarter of this year, to reach $580 billion. So alternative capacity growth accounted for almost half of the total reinsurance market capital growth, and outpaced it in percentage terms

Global reinsurance capital grew by 1% in Q1 2015 - Source: Aon Benfield

Increased reinsurance demand has helped to put this growing industry capital base to work though, with new property catastrophe reinsurance demand helping to soak up excess capital and relieve a little of the pressure seen on pricing at the latest renewal.

Aon Benfield notes in its latest Reinsurance Market Outlook report, that insurers have been taking advantage of growth opportunities “by more fully accessing accretive reinsurance.” At the same time lower risk transfer margins have enabled insurers to reduce government participation in catastrophe prone regions.

Aon Benfield said that it expects this trend, of seeking growth supported by reinsurance capital, to continue, particularly in new lines of business.

“We anticipate even greater reinsurance-supported growth to materialize for insurers exploiting immediate demands for new classes of underlying insurance risks,” the reinsurance broker explains.

Reinsurance capital grew by 1% in the first-quarter, as earnings remained stable and light catastrophe losses continued to support capital growth. The broker notes that M&A has not resulted in any notable contraction of capacity at combined entities this time.

Alternative capital “remains impactful to the overall market for risk transfer, as more traditional reinsurers incorporate into their capital structures and enhance offerings to their primary insurer customers,” Aon Benfield explained.

“Investors continue to show broad interest in insurance linked securities, however, asset managers are demonstrating discipline in their capital deployment,” the broker continued, reflecting the opinion contained in the report we published earlier from competitor Willis Re.

The over 3% growth in alternative reinsurance capital took collateralized sidecar capacity up $1 billion to reach $7.6 billion at the end of Q1 2015. Meanwhile collateralized reinsurance capacity grew by $3 billion in the quarter, reaching $32.7 billion.

ILW capacity stayed roughly static, as the chart further up showed. Catastrophe bond risk capital outstanding shrank to $22.1 billion at the end of Q1, based on Aon Securities numbers and the transactions it includes.

Collateralized reinsurance now almost accounts for 50% of the alternative capital in the reinsurance market, by Aon Securities reckoning. Further growth of the collateralized product is expected, as specialist ILS fund managers have increasingly ramped up their underwriting teams to be able to offer this product to cedents.

Aon Benfield sees as positive the “continued growth in the contribution from alternative capital (especially from collateralized reinsurance and sidecars) and from government schemes (principally the Florida Hurricane Catastrophe Fund)” as these factors have helped cedents to better solutions and also, in the case of the FHCF, helped to soak up some capacity.

Overall at the June and July reinsurance renewals, Aon Benfield says that U.S. demand increased materially for the second year running, with the bulk of this increase coming from Florida and other coastal risks.

Florida companies become heavy users of reinsurance capacity to support their efforts to depopulate policies from Citizens Property Insurance Corporation. This has also led to a number of new cat bond sponsors coming to market and additional opportunities for ILS funds and collateralized players.

Additional demand increases were seen in Chile, Columbia and Australia / New Zealand reinsurance placements.

Looking ahead, the rest of 2015 has relatively fewer renewals of major reinsurance programs, and Aon Benfield expects similar results as the supply and demand trends witnessed recently are expected to continue.

The next big growth opportunity for ILS and alternative capacity from the capital markets will be at the end of this year. The January 2016 reinsurance renewal could see ILS once again leap in size, as the managers of ILS capital become increasingly accepted by major cedents and gain larger shares of renewal programs.