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Alternative reinsurance capital & ILS fueling innovation: Marsh


While evident that the wealth of alternative reinsurance capital has contributed to the decline in rates in the property catastrophe re/insurance industry, its presence and influence has also fuelled innovation as insurers take a more aggressive stance, according to Marsh.

Rate declines across the majority of business lines in the U.S. P&C sector persisted at the key January 2016 renewals, with the challenges of last year continuing into 2016 and showing little or no signs of change.

The entry of alternative reinsurance capital, in the forms of catastrophe bonds, ILW’s, insurance-linked securities (ILS), collateralized reinsurance, and reinsurance sidecar ventures, among others, has slowed somewhat from the levels seen at the beginning of last year, yet continues to hinder any potential positive rate movement.

Importantly, its rapid rise and entry into the global insurance and reinsurance sector has happened at a time of benign catastrophe losses and a diminished opportunity for profits on the investment side of firms’ balance sheets, exacerbating the challenges of a competitive marketplace, resulting in a flurry of merger and acquisition (M&A) activity and reduced profitability for most.

“The additional capital flowing into the property market has generally driven down the cost of traditional reinsurance, which in turn has led to lower premium rates for insureds,” explains Marsh.

The cheaper, more efficient, and abundant supply of reinsurance capital, from both traditional and alternative sources, underlines the supply/demand imbalance currently occupying the space, resulting in a buyers market that has seen reinsurers fight for market share.

However, as companies have adjusted and accepted the permanence and expansion of alternative, or third-party investor-backed reinsurance capital in the space, ILS’ maturity and capabilities as an asset class has helped to drive sector innovation.

“Increased alternative capital availability and more aggressive stances from insurers have pressured reinsurers to reduce pricing and develop products tailored to insurers’ needs,” says Marsh.

Adding; “With products such as insurance-linked securities (ILS) and collateralized aggregate solutions, innovation around capital deployment will continue as investors look to growth opportunities.”

Artemis has reported in the past how a willingness and desire to innovate utilising the wealth of alternative reinsurance capital from insurers and reinsurers is required for ILS to access new risks, a trend that could also alleviate some of the pressures in the softening landscape.

The efficient capital and wide-ranging structures and features of the ILS space is something becoming more and more evident as the investor base, and sponsors of such transactions continue to expand and grow in sophistication also.

Experts, analysts and executives from the insurance and reinsurance industry have in more recent times underlined the importance of re/insurers embracing alternative capital to support growth and innovation opportunities, with the majority of market players now incorporating the capital markets capacity into their business in some form or another.

“The inflow of capital from a more diverse range of sources has fuelled innovation and enabled insurers to access more tailored product offerings and solutions for new risks,” says Marsh.

To date, the majority of alternative capital is focused on the highly competitive property catastrophe lines, owing to its ease of entry and well-modelled exposures.

But as highlighted by Marsh, insurers and reinsurers in their unwillingness to accept further rate declines in the property cat space, and a desire to achieve required returns elsewhere, combined with the efficient flow of ILS capacity, has driven firms to come up with innovative solutions that utilise alternative capital, and helps to fight off competition.

Furthermore, as the global risk landscape continues to change, with emerging markets in parts of Asia, China, Latin America, and Africa, experiencing a growing middle class, rising asset values, and widespread migration to hazard prone areas, at the same time insurance penetration levels remain dangerously low.

The wealth of capacity in the capital markets that’s waiting to be deployed could be used here also, but will require further innovation and willingness throughout the entire insurance value chain.

So while the rise of third-party reinsurance capital has seen insurers, reinsurers, and ILS funds and managers innovate and create bespoke products within the more mature markets, the opportunity for companies to really grow, while at the same time make a huge difference to the sustainability of some of the world’s most vulnerable regions, is also apparent.

Clearly the influx of alternative reinsurance capital has in the past, and continues to pressure rates in the property cat space, providing both opportunities and challenges for market players and contributing to the reshaping of the global re/insurance sector.

But it certainly shouldn’t be feared, as embracing its efficiency, sophistication, permanence and innovative features will likely prove invaluable to the ever-changing risk transfer landscape, and the potential growth opportunities of global insurers and reinsurers.

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