The amount of alternative capital in the reinsurance marketplace increased by 18% to reach $59 billion in the first-half of 2014, according to Aon Benfield, accounting for just over 10% of total global reinsurance capital.
According to the latest edition of reinsurance broker Aon Benfield’s Aggregate report, the broker estimates that global reinsurer capital reached $570 billion by the end of June. The number is a broad measure of the amount of capital that insurers have available to them to trade risk and includes both traditional and alternative forms of reinsurance capital.
At $570 billion at the end of the first-half of 2014, that’s an increase in global reinsurance capital of 6% or $30 billion relative to the end of 2013. So that means that alternative reinsurance capital has once again grown more quickly than traditional capital which with rating agencies citing the growth of ILS capital as credit negative may add to the negative sentiment on some reinsurers.
At the end of 2013 alternative capital made up 9.3% of global reinsurance capital. At the end of the first-half of 2014 that percentage has grown to 10.4%, showing that despite the widely reported high levels of capital commanded by traditional reinsurers, alternative capital is still growing faster than reinsurers can produce excess capital.
That perhaps ought to act as a bit of a red light warning for traditional reinsurers, that even in a period when they are making huge capital gains they cannot grow their traditional capital as fast as the capital markets is entering reinsurance. With the widely reported structural change that is occurring in reinsurance, this is yet another indicator that the outlook for traditional reinsurers will remain challenging.
Aon Benfield notes that the growth of alternative capital continues and the involvement of capital market investors in reinsurance through non-equity participations continues to expand. The record catastrophe bond issuance seen in the first-half of the year is evidence of this, alongside growth in collateralized reinsurance placements, the formation of new sidecar vehicles as well as the exploration of new business models by hedge fund managers and startups.
One of the positive side-effects is that net catastrophe exposures of the group of 31 Aon Benfield Aggregate reinsurers are dropping, as they take advantage of alternative capital to lay off increasing amounts of risk to the capital markets through sidecars, ILS and cost-effective retrocession.
However, fundamentals are more negative and underwriting margins have been hit by competition. As well as this the average combined ratio of the reinsurers Aon Benfield tracks has increased by 0.4% to 90.3%, despite catastrophe losses remaining very low.
Mike Van Slooten, Head of Aon Benfield’s International Market Analysis team, commented on the numbers; “The influx of alternative capital is lowering risk transfer costs for both insurers and reinsurers, creating a win-win situation that should drive market expansion in the medium-term. Aon Benfield has made major advances in its analysis of reinsurers’ financial performance in recent years, in response to growing insurer demand for strategic insight into longer-term industry trends. We are closely monitoring developments in what is a very dynamic environment. As such, peer studies such as the ABA report, which assess comparative performance on a timely basis, are becoming increasingly relevant.”
Aon Benfield’s estimate of $59 billion of alternative capital in the reinsurance market seems a very reasonable one. We have ILS investment and fund managers listed in our Insurance-Linked Securities Investment Managers & Funds Directory with assets of over $51.2 billion under management. Given the number of direct investors and other forms of reinsurance capital such as hedge fund backed reinsurers or sidecars, it is possible that the $59 billion could actually be a little lower than the reality.