At a record level of $62 billion at the end of September 2014, alternative or non-traditional reinsurance capital makes up between 40% and 50% of global catastrophe reinsurance capital, or 12% of total reinsurer capital, according to Aon Benfield.
Alternative reinsurance capital, deployed into the market through insurance-linked securities (ILS) such as catastrophe bonds, reinsurance sidecar vehicles, collateralized reinsurance, industry loss warranties (ILW’s) and other capital market instruments, has grown to a level where it has become a “price taker rather than a price taker” Aon Benfield explained in its latest Reinsurance Market Outlook report.
The growth of alternative capital to a level where it is no longer considered as simply an alternative, rather it is looked on as a viable, often lower-cost and regularly more efficient source of reinsurance capacity, has helped it to become a positive influence on the reinsurer business model.
In its report, Aon Benfield notes that ILS and non-traditional reinsurance capital has helped to improve the reinsurance value proposition to “new generational highs,” bringing efficiency and other benefits to reinsurers that have embraced it and providing them with an edge at the latest set of reinsurance renewals.
Through 2014, up to the end of September, non-traditional reinsurance capital has grown by approximately $12 billion, Aon Benfield says, to just under $62 billion. This growth of around 25% has helped it to become 12% of total reinsurance capital, an influential proportion of the capital available to provide reinsurance and retrocession cover, but is has taken it to between 40% and 50% of global catastrophe reinsurance capital, a position from which it can begin to lead instead of follow.
Aon Benfield notes that while ILS and non-traditional reinsurance capital has a meaningful effect on the reinsurance market as a whole, it’s influence is much greater when you consider where the bulk of this capacity is deployed.
The broker explains; “When USD62 billion of alternative capital is compared to capital traditional reinsurers may be willing to risk upon the occurrence of a 250 year event or series of events, its influence is far more substantial – 40 to 50 percent, hence, disruptive in the property catastrophe sector of the reinsurance market.”
Interestingly, Aon Benfield believes that the fears that alternative capital will move wholesale into other lines of reinsurance business may be overblown. In fact, the broker says that it expects that the next disruptive move from ILS and alternative capital will be into the property insurance and business interruption markets, rather than somewhere like the casualty reinsurance market.
In 2014 it was not catastrophe bond capacity that provided the majority of the growth in alternative reinsurance capital. Cat bond capacity only grew by $2.4 billion over the first-nine months of 2014, according to Aon Benfield, while collateralized reinsurance in all its forms grew by more than 25%, from $23.4 billion to $29.4 billion.
There was growth in both collateralized reinsurance sidecars and industry loss warrants (ILW’s) as well. Aon Benfield recorded 50% growth for sidecars and near 100% for ILW’s in 2014, but notes that these both remain smaller parts of the overall $62 billion of alternative reinsurance capital.
By the end of 2014 Aon Benfield Securities records the size of the outstanding catastrophe bond and ILS market at $24.3 billion, an increase of 18% over the full-year. That compares to the just over $25 billion in the Artemis Deal Directory, as we include a few additional deals. Artemis recorded an increase in cat bond risk capital outstanding of almost $4.5 billion, or 22%, for the full-year 2014 in our latest report.
As alternative capital, ILS and collateralized reinsurance capacity increasingly become a major part of global reinsurer capital, the influence of these instruments and lower-cost capital will increasingly be felt. Aon Benfield notes the disruption that alternative capital has created, however as the percentage of the market it commands grows there is the chance of even greater disruption to incumbents.
Only in the last few months a number of interesting new business models have emerged which look to leverage the lower-cost and efficiency of ILS capital, while providing underwriting and management expertise but without holding the risk themselves. This business model is so new that as of now we have no idea how much this could work, create further disruption or erode the traditional reinsurers market-shares even further.
2015 looks set to see further headway and penetration made by ILS and non-traditional capital into the reinsurance and insurance markets. With Aon Benfield forecasting alternative capital’s penetration into property insurance and business interruption, two areas we’ve long discussed are suitable for ILS and structural features such as parametric triggers, the opportunities for ILS investors also look set to grow which could bring even more capital into re/insurance.
With no sign of the disruption stopping, it looks like the insurance and reinsurance market are set to reap the benefits of capital efficiency, mobility, cost and capital market structuring expertise. That could lead to more pain for incumbents, but also to significant opportunity for those who are prepared to embrace alternative capital and ILS even more deeply within their own business models.