ILS capital supply more than replenished in 2023, outgrew expectations: AM Best

Third-party capital in reinsurance, so alternative capital or insurance-linked securities (ILS) market capacity, was more than replenished in 2023, as lost capital was replaced and market growth accelerated to levels beyond expectations at the start of the year, rating agency AM Best has said.

AM Best reports again on reinsurance capital estimates for the start of 2024, working with data from reinsurance broker Guy Carpenter.

While reinsurance capital appears more than adequate to satisfy buyers, albeit perhaps not so much at the lower and more frequency loss driven end, there is no sign of broad softening at this time.

AM Best noted that third-party capital experienced some issues at the start of 2023, in particular with a number of established players on the investor side withdrawing capacity from the market.

But, “The lost supply was fully recouped and even expanded throughout the year,” AM Best explained.

The rating agency notes that helping this were higher nominal amounts traded and invested across some of the ILS market instruments, including catastrophe bonds, reinsurance sidecars and collateralized reinsurance.

As we reported before, AM Best and Guy Carpenter revised their original forecast for year-end 2023 third-party capital in reinsurance.

Originally the pair had projected that third-party capital in reinsurance would end 2023 at $99 billion, but the market outpaced this forecast.

But that forecast was revised, with third-party capital in reinsurance estimated to have reached US $100 billion at the end of last year.

It is the highest level this figure, reported by AM Best and Guy Carpenter, for alternative and ILS capital in reinsurance, has ever reached.

AM Best said that with issuance of catastrophe bonds reaching a record-high in 2023, it further justified the revision to the third-party capital forecast.

It is interesting to compare the figures that have been released for 2023.

While there is always some differences between the numbers from different reinsurance brokers and ILS broker-dealer teams, it is the growth amount for 2023 that is perhaps most stark.

The AM Best and Guy Carpenter figure of $100 billion reflects only 4% growth in third-party reinsurance capital for 2023.

Where as, broking group Aon’s Reinsurance Solutions team puts the year-end alternative and ILS capital total at $103 billion for 2023, while that team’s growth percentage for the full-year stands at a far more impressive 11%, as we reported recently.

While the difference is stark, the truth is likely somewhere in the middle of all of these figures, as ever.

The main takeaway should be that alternative and third-party reinsurance capital resumed a faster pace of growth in 2023 and importantly that did not affect the market unduly, with rates remaining largely firm at the end of the year, albeit some higher-layer property catastrophe reinsurance rates have softened a little with cat bond pricing down roughly 10% from its peak.

Looking ahead, AM Best is not anticipating a significant softening of reinsurance anytime soon and does not believe a wave of start-up capital will flow in, also saying that any that does is likely to be small compared to the retained earnings growth reinsurers will experience.