Swiss Re Insurance-Linked Fund Management

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ILS provides Europe’s major reinsurers with underwriting flexibility: Fitch


The four major European reinsurers continue to use the features and capacity of the insurance-linked securities (ILS) space to transfer peak risks. Utilising alternative capital provides the firms with additional underwriting flexibility and is supportive of strong risk management, according to Fitch Ratings.

The four large European reinsurance companies, Munich Re, Swiss Re, SCOR, and Hannover Re, are all regular participants in the ILS space, utilising catastrophe bonds and other forms of ILS to transfer a range of peak natural catastrophe exposures.

In a recent report examining the performance and operations of Europe’s big four reinsurers, global financial services ratings agency, Fitch Ratings, notes their use of alternative reinsurance capital and how this contributes to strong risk management.

“The large scale of the four companies’ reinsurance portfolios has enabled them to utilise a variety of alternative risk transfer mechanisms, including ILS or catastrophe bonds,” said Fitch.

All four reinsurers are regular issuers of catastrophe bonds explains Fitch, which provides them with an efficient means of transferring peak catastrophe exposures to the capital markets, along with longevity and mortality risks tied to life reinsurance business.

As recorded by the Artemis Deal Directory, the most recent catastrophe bond from Munich Re was the $190 million Queen Street XII Re dac transaction. For Hannover Re the most recent deal it participated on was the $300 million Acorn Re Ltd. (Series 2015-1) deal, while SCOR sponsored a $300 million Atlas IX Capital DAC (Series 2016-1) cat bond issuance.

For Swiss Re, the most recent cat bond issuance it participated on was the $100 million Vita Capital VI Limited (Series 2015-1) transaction.

Highlighting the ability of ILS to enable reinsurers to transfer a range of peak risks, the above deals cover a range of exposures across a variety of locations, including extreme mortality in Australia, Canada and the UK, U.S. hurricane, U.S. earthquake, Australian cyclone, U.S. named storms, and Canada earthquake risks.

“The ability to transfer peak exposures in this way provides additional flexibility when underwriting lines, as well as bringing diversification to risk programmes,” said Fitch.

It’s no secret that the inflow of alternative reinsurance capital in the global risk transfer landscape has contributed to the softening landscape and persistent rate declines across a variety of reinsurance business lines.

A notion highlighted by Fitch; “The P&C reinsurance operating environment is challenging. In recent years, low barriers to entry, in combination with declining investment yields, have resulted in the encroachment of alternative capital, especially into US property catastrophe lines.”

It’s important to remember that although its presence in the space has presented challenges for insurers and reinsurers, it’s also an opportunity to embrace a diversifying asset class that can add value to balance sheets, something of increasing importance in the current market environment.

Artemis has discussed numerous times how the features and capital of the evolving ILS space, if embraced in a sensible and sophisticated manner, can enhance a reinsurers business portfolio and bring welcomed diversification.

At the same time, as the ILS space has matured and has become more widely accepted as an alternative asset class, investors in the space have become more and more willing to assume insurance and reinsurance-linked business.

As noted by Fitch, the larger scale of Europe’s big four reinsurers enable them to utilise a range of ILS features to supplement their business mix and increase efficiency in challenging market conditions. For those that work with the expanding world of ILS and embrace its presence, as opposed to competing with it, opportunities to improve efficiency, diversify, and innovate do exist.

Read all of Artemis’ Monte Carlo Rendez-vous coverage here.

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