Alternative reinsurance tools which enable transformation of risk to capital market interests should continue to gain market share, but will likely remain a niche product, within the global reinsurance market, said Swiss Re at their recent insurance-linked securities media event. They acknowledged at the event that the convergence of catastrophe bond and traditional reinsurance pricing has now been accomplished but the capital market share of reinsurance, while growing, will remain supportive.
Currently Swiss Re estimates the size of the reinsurance convergence space, where products such as catastrophe bonds, insurance-linked securities (ILS), industry loss warranties (ILWs), collateralized reinsurance and sidecars have emerged, at approximately $35 billion. Cat bonds and ILS make up the largest component of this growing sector, with collateralized reinsurance second and ILWs third.
These products serve different needs and as such Swiss Re believes they are here to stay, albeit as a niche and supporting part of the overall reinsurance sector. Catastrophe bonds are tradable and liquid, offer an alternative to traditional reinsurance and can be structured to complement other reinsurance or retrocessional covers. Industry loss warrants (ILWs) and collateralized reinsurance are typically covering more risky portfolios and are playing an increasingly important role in the retro market. ILS and cat bonds are used more evenly across insurers and reinsurers where as ILWs and collateralised covers tend to be more the domain of reinsurers.
These instruments are beginning to play to their strengths as well. The cat bond market, particularly now pricing has come into line with reinsurance, has expanded to offer a number of ways to structure and trigger a transaction meaning they can be tailored to suit insurers or reinsurers and fit well within a reinsurance or retro program. It’s also becoming more cost-effective to issue smaller cat bonds which should help to open the market up to more primary insurers. Collateralized reinsurance and ILWs are largely soaking up capital which flows into the reinsurance space for use in the retro markets, where premium rates can be much higher and this meets reinsurers retrocessional needs.
The range of products within the convergence space also offers choice to investors and helps to attract additional capital to the space. Investors can attain the risk/return profile they desire by investing across the spectrum of reinsurance-linked instruments via a fund or can gain higher exposure levels, and greater potential returns, by investing directly in transactions. In this way the market is beginning to become more balanced, and is able to meet a broader range of investor needs, which should help to encourage continued interest from new sources of capital.
The natural catastrophe reinsurance market, particularly for catastrophe excess of loss reinsurance, has been growing at a compound annual rate of almost 10% over the last 18 years, according to Swiss Re. This trend is expected to continue as exposures grow in developing nations, insurance penetration increases and regulations encourage greater risk transfer.
The cat bond market, Swiss Re said, has been enjoying a compound annual growth rate of more than 20% since inception, but still remains a niche part of the overall catastrophe reinsurance space.
Swiss Re believes that cat bonds and other capital market funded risk transfer instruments and techniques are a strong and growing part of the overall reinsurance market. They believe that this convergence segment will continue to grow its share of the overall market, but also recognise that these tools will likely remain a niche albeit increasingly complementary component of the reinsurance sector.
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