Collateralized capacity increasing share of retrocessional business: Aon Benfield

The retrocessional reinsurance market, where reinsurers look for their own reinsurance cover, is an area where collateralized capacity from reinsurance funds, sidecars and catastrophe bonds or ILS, is increasingly being put to work. The retro reinsurance market has seen some dislocation over the last year or two, thanks to the catastrophe loss burden from 2011, catastrophe model changes and regulatory issues. This has, in some ways, made retro a particularly attractive proposition for investors.

In their latest annual insurance-linked securities market report, Aon Benfield Securities provide some interesting insight into the growing level of participation that non-rated collateralized capacity is playing in the retro reinsurance market.

Their report suggests that sidecar formation and investor participation in the retro market has been driven somewhat by a ‘retrenchment’ in the retrocessional reinsurance market. The report notes that as there was not a slew of new reinsurance company formations in 2011, which we discussed in an article yesterday, investors have sought out opportunities via collateralized capacity investments into the retro market instead. This has made sidecar capacity in particular much more of a feature in the retro reinsurance market in the last year.

Rated reinsurance capacity vs non-rated collateralized capacity in the retrocession market - Source: Aon Benfield Securities

Aon Benfield says in their report that unless we see some catastrophe events over the next few months they don’t foresee much in the way of new sidecar formation next year. However they note that many retro buyers now rely on sidecars and funds for risk transfer capacity and therefore they say it is likely that the existing collateralized players are likely to continue attracting capital. This is especially true given the high investor interest in the reinsurance space.

As you can see from the graph above, sidecar type collateralized capacity contributes over 40% of the retro market. That figure could well grow further over the next year if institutional investor capital continues to flow into reinsurance funds and sidecars.

You can read more about Aon Benfield Securities annual report in our article from last week.