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Low-cost of catastrophe reinsurance capital an opportunity: Aon Benfield


The record low-cost of reinsurance capital for catastrophe risks, made cheaper partly by the entry of efficient ILS capital, is an opportunity for growth that insurers should take advantage of, according to reinsurance broker Aon Benfield.

Reinsurance capital for underwriting catastrophe risks is at the cheapest level it has been, thanks to the high levels of capitalisation in the traditional reinsurance market which saw overall reinsurance capital grow to $570 billion plus the rapid growth of insurance-linked securities (ILS) and alternative capital, which grew 18% in just the first-half of this year to $59 billion.

In fact, reinsurance broker Aon Benfield said today that the cost of reinsurance capital for catastrophe risk has dropped to one-third to one-half of the cost of equity capital for insurers in many instances, making protection much cheaper.

At the same time insurers have been taking advantage of buying multi-year covers from reinsurers and the ILS market, which makes insurers sustainable growth plans in catastrophe prone regions a more plausible prospect, Aon Benfield explained in a report released today.

In fact, multiple-year reinsurance capacity has now become so popular and prevalent that some of Aon Benfield’s clients split their reinsurance cover into three buys of three-year durations each, a very efficient way to access protection.

Bryon Ehrhart, Chief Executive Officer of Aon Benfield Americas, said at the brokers press briefing in Monte Carlo today that he actually expects that the January 2015 renewals may see less capacity renewed, as so much of it is now on a multi-year basis.

Ehrhart commented; “Insurers can count on sustainable reinsurance capacity to support growth in their toughest geographies and most difficult lines. In the anticipated renewal market conditions, insurers have new avenues to reduce risk, release capital and improve net results.”

At the press briefing, CEO of Aon Benfield Eric Anderson, said that reinsurers and brokers need to look to growth to utilise the excess capacity and capital interested in the space. Moving risk from governments to the private sector is one example of how excess capacity could be an opportunity for the reinsurance market to grow significantly, he said.

Retrocession is another area of opportunity to soak up some excess reinsurance capacity, Dominic Christian, Executive Chairman of Aon Benfield International. Retro take-up remains low, surprisingly low for the amount of reinsurance risk and reinsurers should also take advantage of cheaper capacity to offload more risk but should also see retro provision as an opportunity as well.

Paul Schultz, CEO of Aon Benfield Securities the ILS and capital markets practice of the broker, said that his forecast that alternative capital could grow by $100 billion in five years remains on track. In fact he said that this could be ahead of pace, based on how quickly the capital market has moved into reinsurance over the last year.

Schultz expects catastrophe bond and insurance-linked securities (ILS) issuance will continue to grow, as evidenced by the number of new sponsors coming to market so far this year, which shows that the risk transfer offered by ILS is still gaining new converts and at an increasingly rapid pace. Also helping its growth is the availability of indemnity and UNL cat bonds for perils such as European windstorm, which Schultz believes will attract more sponsors to the space.

Schultz also said that he expects more investors to come into ILS as the asset class is still valued at a premium if you compare its sharpe ratio with other similar alternative investment classes. However the supply of capital will continue to outstrip demand for cover, so expect investors to continue looking to new risk classes and lines of business for returns.

The low-cost of capital and efficiency inherent in capital markets backed ILS and collateralized reinsurance is expected to be seen as a real opportunity by insurers and they could help to stimulate the next phase of the markets growth. With brokers like Aon Benfield encouraging their clients to capitalise on this opportunity it will be interesting to see whether this translates into additional deal-flow, particularly in the cat bond space where pricing has never been so compelling before.

The Reinsurance Market Outlook report from Aon Benfield can be downloaded in full here.

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