Reinsurance well-capitalised despite lack of ILS inflows, retro not so much

The global reinsurance sector remains very well-capitalised as the 2019 Atlantic hurricane season begins and this is despite the fact the insurance-linked securities (ILS) market did not attract significant fresh inflows, according to Moody’s.

The rating agency said that it believes the rated reinsurers it covers have solid capital positions to help them withstand potential hurricane losses in 2019 and highlights the strength of reinsurance capital in general.

Moody’s believes that global reinsurance capital has remained relatively steady despite the impact of around $240 billion of catastrophe losses over the previous two years.

This is testament to the robustness of the reinsurance business model in 2019, which of course has been greatly assisted by alternative capital taking a large share of these losses and helping reinsurance firms through their retrocession.

Despite a dent to profits thanks to the impact of catastrophe events, Moody’s Investors Service notes that reinsurers have traded forwards successfully through renewals so far this year and stand to benefit from improved rates.

However, some reinsurers have been resetting their exposure assumptions following the impacts of loss creep and social inflation to losses from recent years, as loss costs escalated above their expectations and some perils delivered an unexpected blow such as the wildfires.

Alternative reinsurance capital did not flood the market in 2019, Moody’s notes, as ILS funds were dealing with continued loss creep and juggling trapped capital which reduced their available capacity to underwrite new business.

Additionally, Moody’s believes some investors have withheld new allocations to ILS following the recent loss years, likely waiting out to see how the asset class performs and resets its return expectations.

The result of all of this has been a tightening of reinsurance capacity, even if reinsurance capital remains abundant, lifting property catastrophe reinsurance pricing as the market resets itself.

Looking ahead, Moody’s explains that it expects that, “Significantly improved pricing at June and July renewals, with a strong focus in Florida, as well as broad-based pricing improvements in primary lines to set the stage for stronger sector profitability in 2019.”

There’s one question though, that isn’t really being addressed, surrounding the lack of retrocession capacity from the capital markets and how this is going to affect reinsurance firms through 2019, especially if there are any major hurricanes or other losses.

With retrocession capital having been eroded by losses and also withdrawn in some cases such as the lack of pillared coverage provided by Markel CATCo in 2019, many reinsurers have entered the Atlantic hurricane season with much less robust protection in place.

On the other side of their books though, we understand there is little evidence of many reinsurers pulling back from U.S. wind or catastrophe exposed regions due to this reduction in their protection.

So how is that being managed?

In some cases it appears that reinsurer owned third-party capital or ILS vehicles are increasingly looking akin to a retro capacity source, for some companies.

We even see reinsurance giant Swiss Re returning to the catastrophe bond market in 2019 for the first time in years, an unexpected happening perhaps partly driven by the reinsurers retro needs this year. In addition AXIS returned yesterday with another catastrophe bond, perhaps also suggesting a need for retro in advance of the wind season.

The catastrophe bond market could provide an opportunity for some of the larger reinsurers to hedge out the wind exposure they may have underwritten at these renewals, but not have as much retrocession protection for. Hence it will be interesting to see whether any more cat bonds come to market this summer.

So far we haven’t seen any new retro start-ups, although the market has been awash with rumours that some known players could look to launch a pillared type of product, to capitalise on the lack of that sort of protection. This rumour has been rife for almost a year now, with nothing as yet coming to market.

It’s worth questioning though, whether the lack of available retrocession combined with reinsurers’ seemingly undiminished appetite for catastrophe risk, may mean that the investors backing some third-party capital vehicles (sidecars) and reinsurer-managed ILS funds are providing more opportune retro capital than the partner capital they perhaps believed they represented.

It’s a fine line between a third-party vehicle being a fully aligned partner to a re/insurer and becoming a simple source of retrocession. Alignment matter here, as too do optics. Searching questions should always be asked by investors, to ensure they really are partners in any re/insurer sponsored ILS ventures.

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