There was more than enough inflow of alternative capital to renew coverage for cedants on 1 January 2018, even after severe natural catastrophe events in 2017 caused $138bn in insured losses globally. This had the effect of limiting the extreme price hikes that would traditionally have followed such severe losses, notes S&P Global Ratings.
Investors, scenting the chance of increased returns, replaced capital that had been put aside as collateral to cover insured losses, enabling them to participate in the 1 January 2018 round of renewals. Many observers had assumed that investors who entered the ILS market during the recent string of benign catastrophe years might take fright when investment returns turned negative. However, S&P saw no capital flight following the negative investment returns that followed the 2017 hurricanes as losses were within investors' expectations. The latest figures show that ILS funds had combined assets under management of nearly $100bn by July 2018.
Reinsurers on their part have embraced third party capital through instruments like sidecars, collateralised reinsurance, and catastrophe bonds. Increasingly, the retrocession market depends on this convergence capital, says the international rating agency in a report published this week on the effect the continued growth of ILS will have on reinsurers' competitive positions.
Overall, the use of collateralised reinsurance, sidecars, and catastrophe bonds has helped the reinsurance industry to increase its premiums while maintaining its net exposures. Collateralised reinsurance will continue to represent the majority of convergence capital.
S&P continues to see alternative capital testing products in new areas, such as casualty or life reinsurance, on the heels of success in property catastrophe business. The increased complexity and longer tail of products in these new sectors have yet to strike a chord with investors, however.