Arndt Gossmann, the Chief Executive Officer (CEO) of run-off specialist DARAG, expects the legacy market to experience significant growth in 2017, driven in part by the growing appetite for run-off business from third-party investors.
Around this time last year Gossmann said that he expects alternative reinsurance capital and insurance-linked securities (ILS) investors to increase their appetite for participation in insurance and reinsurance run-off transactions, and the message for 2017 is a similar one.
Alternative, or third-party reinsurance capital has influenced all areas of the insurance and reinsurance industry, and Gossmann notes that the run-off re/insurance sector has become increasingly appealing to capital markets investors.
“Run-off investments offer uncorrelated returns with low volatility – a sought-after strategy today. This current investment trend correlates positively with the run-off industry’s constant need for capital,” says Gossmann.
According to Gossmann the average legacy transaction size in 2014 was roughly €20 million ($21.53mn) and has increased dramatically to approximately €200 million in 2016 ($215.3mn), with some single deals even totalling up to as much as €1 billion ($1.07bn).
“Obviously, third-party capital is necessary for bigger and smaller players alike if they are to meet market demand, diversify their capital base and offer attractive and sound pricing. In 2016 we saw structured solutions involving multiple players. Our approach has been to employ and channel alternative capital within our own structures, such as DARAG’s Protected Cell Company (PCC) /R-pad’, continued Gossmann.
Returns in the reinsurance market remain under pressure from a series of headwinds that show little sign of diminishing anytime soon, and these same pressures and resulting rate declines are also impacting the ILS space.
Investors in the ILS market appear eager to increase their participation in diversifying insurance and reinsurance risk, and with the run-off market expected to double in the coming months third-party investors could look to legacy deals as an attractive business line.
Some €4 billion ($4.3bn) of run-off transactions completed in 2016 and Gossmann expects this to grow to more than €8 billion ($8.6bn) in 2017. And with ILS capacity predicted to grow its contribution to the space, the proportion of re/insurance risk finding its way to the capital markets looks as though it will continue expanding.