Estimated $20bn of ILS capital trapped at 1/1: JLT Re

Global reinsurance broker JLT Re has said that as much as $20 billion of alternative reinsurance capital was trapped at the January 1^st 2019 renewals, contributing to a slowdown in new capital inflows.

After the impacts of 2017 catastrophe events on the reinsurance market, there were fears of ILS capital scarcity at the January 2018 renewals as a result of trapped collateral in the ILS space.

However, funds reloaded and actually expanded in time for the January 2018 renewals, dampening any rate rises and underlining the ILS sector’s commitment to the insurance and reinsurance space.

On the back of 2017, last year was another above-average catastrophe loss year, and, unlike the previous year, the volume of new alternative reinsurance capital entering the market at 1/1 2019 has slowed.

“Whilst the market continues to be well capitalised, as much as USD 20 billion of alternative capital was trapped and not deployable at the 1 January 2019 renewal,” says JLT Re in its recently published Reinsurance Market Prospective.

The reinsurance broker explains that 2018 did not come anywhere near to replicating the ILS capacity reload witnessed in the previous year. For example, while $8 billion of new capital entered the market in the final quarter of 2017, less than half of this was raised during the fourth-quarter of 2018.

As a result, JLT Re says there is discussion within the re/insurance space about the appetite of capital markets investors that participate in the ILS space going into 2019, and also what this might mean for both pricing and the availability of capacity.

The broker explains that through 2018, investors observed lower expected net yields and what appeared to be higher correlations to other asset classes. Combine this with lower-than-expected rate increases at 1/1 2018 after significant cat losses and another year of losses, and it might be tempting to conclude that investor appetite has abated, says JLT Re.

However, it is important to remember that as a percentage of dedicated reinsurance capital, ILS capital continues to expand, and the low correlation and diversification benefits of ILS remains attractive to the investor community.

The fact ILS capital inflow has slowed could also be a sign of increased maturity and sophistication of the sector during challenging and competitive re/insurance market conditions.