ILS capital growth triggers cycle management in reinsurance: A.M. Best

The steady year-on-year growth of alternative capital from the capital markets and insurance-linked securities (ILS) funds has triggered cycle management in the reinsurance market, as those capable seek to navigate around the pressure it creates, according to A.M. Best.

Rating agency A.M. Best explains alternative capital in reinsurance as a factor that looms like “an additional pressure-bearing front” alongside the other pressures which make the agency maintain its negative sector outlook for the global reinsurance industry.

The long-term viability of the reinsurance business model is at risk, A.M. Best said yesterday and the ongoing, steady growth of ILS or convergence capital in the reinsurance industry remains a key factor that is adding to the pressure traditional reinsurers face.

Alternative capital now accounts for roughly “20% of the dedicated global reinsurance market capacity” according to A.M. Best. This is higher than Aon Benfield’s estimate of $75.1 billion of ILS capacity being 13% of global reinsurer capital at the end of June 2016, but A.M. Best’s figures for capital in reinsurance differ somewhat.

However the main message is that alternative capital and ILS have continued to grow, and this trend has caused the emergence of much more active cycle management among reinsurers.

“This percentage has been steadily growing year over year, underscoring why cycle management has been a key strategy for organizations possessing the capability to move between primary and reinsurance platforms,” A.M. Best explains.

The ability to switch capacity from reinsurance into primary lines of insurance, or to divert capacity into different lines of reinsurance where alternative capital and ILS is not so prevalent, helps the larger reinsurers to better navigate the softened market environment.

Reinsurers themselves are stimulating this need for greater cycle management by utilising more capital markets capacity themselves as well. A.M. Best notes that this helps them to optimise results and reduce their probable maximum loss for peak zone perils as a percentage of their capital.

So alternative capital is both a help for reinsurers, in terms of enabling them to make their business profiles more efficient, but also hindrance as it pushes them to more actively manage the reinsurance cycle and also increases the competition they face.

So “continued pressure from convergence capital” is a negative factor that A.M. Best cites in its reiteration of the less than healthy reinsurance market outlook.

However reinsurers need to ensure that they remain relevant to the capital markets, A.M. Best notes, which suggests the rating agency foresees the need for some companies to continue to leverage greater quantities of ILS and convergence capacity.

The longer the trend persists, of reinsurers coming under negative pressure, the more likely it is that we’ll see reinsurers turning to alternative capital to lower their own cost of underwriting capacity and to better manage the cycle.

Capital market capacity is a key element of reinsurance cycle management for so many companies now and that is only likely to expand, which at the same time will present opportunities for established ILS fund managers to grow their market share in the key catastrophe zones of the world.

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