Losses unlikely to harden reinsurance market, slow down ILS: CreditSights

Despite the widespread damages caused by recent hurricanes in parts of the U.S. and the Caribbean, it’s unlikely to result in a harder reinsurance market in 2018 or a meaningful reduction in the entry of alternative reinsurance capital, according to a recent report from CreditSights.

The report finds that losses from hurricanes Harvey, Irma and Maria, combined with the impacts of earthquakes in Mexico, “may not be big enough” to drive the turn in reinsurance market pricing than many in the space had been hoping for.

As a result, the analysts suggest that a hard reinsurance market in 2018 may be wishful thinking,

The majority of U.S. and European reinsurance firms remain well capitalised, and in light of this and despite recent events, CreditSights expects the P&C reinsurance market to continue to be impacted by an oversupply of capital.

The capital is coming from both traditional and increasingly alternative sources, and CreditSights highlights the continued expansion of insurance-linked securities (ILS), or alternative capital as a part of the overall reinsurance landscape.

“Furthermore, we are uncertain that the influx of alternative capital will be meaningfully slowed by recent events,” explains the report.

In the days and weeks after the hurricanes, some re/insurance industry analysts and experts had described this as the first real test for the ILS space, which is most active in the U.S. property catastrophe arena.

Some in the sector had questioned the permanence of alternative reinsurance capital and how it might react after a large event, but CreditSights is uncertain that these events will scare investors away from the sector.

Furthermore, it’s been reported that a substantial volume of capital is sat outside the reinsurance market waiting to take advantage of any opportunities, with much of this capacity expected to be from capital markets investors.

Many reinsurers now work with ILS in one way or another, via collateralised reinsurance, catastrophe bonds, sidecars and so on, in an effort to limit their exposure to events, such as major hurricanes. The report says the net exposure will also depend on reinsurers retrocessional programmes, another area ILS capital is active.

Discussing the broader impacts of ILS, the report says; “Alternative sources of reinsurance covers such as cat bonds, ILS and sidecars tend to focus on specific lines of businesses.

“The supply has grown significantly over the past few years, nevertheless we do not believe that they are a threat to steal a significant share of business from the top ten reinsurers since reinsurers tend to offer tailor-made reinsurance programmes, though alternative capital may impact pricing.”

Alternative reinsurance capital remains heavily focused on property catastrophe lines of business, but is increasingly looking to access risk more directly and both investors and sponsors appear willing and able to enter new business lines and regions.

While price rises are anticipated to be highest in retrocession, even these may be short-lived it is believed. The January renewal may see broad rate rises, although not a true hardening, but June 2018 could be the real test of whether any increase in rates can be sustained long-term.