Post-loss capacity most likely to come from capital markets: A.M. Best

Ratings agency A.M. Best expects alternative reinsurance capital to continue entering the reinsurance sector for the foreseeable future, with the majority of any additional capacity inflows after the next large event most likely to come from the capital markets.

Ever since the inflow of insurance-linked securities (ILS) capital and features started to meaningfully influence the reinsurance sector, its post-event reaction has been a hot industry topic. For the most part, ILS funds and managers remain untested in the face of a significant loss event, and this has led some in the sector to question its longevity when the next big event does happen.

“The next major catastrophe will be the first for most ILS fund managers. How they might react is uncertain, but if capacity issues arise, history has shown that new capital will enter the market.

“A.M. Best expects that this additional capacity is more likely to come from capital market solutions than the more traditional creation of “brick and mortar” reinsurance/insurance companies,” said A.M. Best, in one of its reinsurance market reports released in time for the 2016 Monte Carlo Rendez-vous.

It’s typical for new capital to enter the insurance and reinsurance sector after an underwriting loss event, as companies look to take advantage of any price increases and replace the capital that has left the space. While this is no different for the next large loss event, some in the space have questioned where this capital might come from, but for A.M. Best it’s clear that this will most likely be from the ILS space.

The inflow of new capital following an event promotes market stabilisation and also addresses any capacity issues. And while A.M. Best expects this to come from the wealth of capital markets solutions, the reported abundance of capital sat on the sidelines waiting to enter the space after the next event, and the strong capitalisation of the industry, suggests any post-event price-surge will be minimal.

In fact, towards the end of last year Artemis discussed how industry leaders had noted that more ILS capacity would enter the space than exit post-event.

Furthermore, A.M. Best explained last month that any price surge for London market insurers and reinsurers post-event would be dented by sidelined capital, a trend that A.M. Best also notes for the broader reinsurance marketplace in its recent report, Innovation: The Race to Remain Relevant.

“The inflow of capital from the Insurance-Linked Securities (ILS) market and other collateralized forms of reinsurance, especially for U.S. catastrophe-exposed business, continue to contribute to the competitiveness of the market and post-event will likely dampen any potential for lift,” said A.M. Best.

Despite market headwinds and dwindling returns, capital markets investors remain attracted to assuming insurance and reinsurance-linked business. A trend that isn’t expected to end anytime soon. The increased sophistication of ILS investors in more recent times has resulted in a greater understanding of the underlying exposures, and ILS players will likely be keen to capitalise on any opportunities post-event.

Only time will tell who runs and who stays after the next large loss event, and where any inflow of capital will come from. But it’s clear that A.M. Best expects the capital markets to play an important role in recapitalising the space post-event, underlining the fact that the ratings agency expects ILS to be here for the long run and continue to deepen its relationship with the insurance and reinsurance landscape.

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