“These dynamics have made the reinsurance industry healthy from a capital perspective, but major loss activity in the first half of 2021 was at its highest level in 10 years due to higher-than-average losses in the US and Europe. In fact, overcapitalization and valuation recovery have led to a recovery in dialogue on strategic and transformative transactions. “
Brian Schneider, senior director of insurance ratings at Fitch Ratings, said the global reinsurance industry’s capital outlook is “very strong,” adding that capital has tended to be positive for some time. According to Schneider, this has allowed the industry to “endure many extraordinary losses,” especially in recent years.
“Traditional capital still dominates the big picture,” Schneider said. “It provides [approximately] At 85% of the current reinsurance market capacity, this level has remained almost unchanged since 2015.However […] In the first quarter, we saw some alternative capital growth. [According to Aon’s Reinsurance Market Outlook Update]Alternative capital increased US $ 2 billion to US $ 96 billion in the 121st quarter. This is due to the issues surrounding loss creep and some of the trapped ILS capital that occurred after several major catastrophes in 2017 and 2018, causing investors to retreat slightly from alternative capital 2019. It follows the decline in the year and 2020. “
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Alternative capital in the reinsurance market is very closely monitored by Kumar and the GC Securities team. This is because it provides a significant portion of the retroactive capacity of the global industry and, as a result, impacts the wide availability of reinsurance.
As of mid-2021, Kumar’s team estimates that approximately US $ 32 billion, or 35% of alternative capital, was allocated to Rule 144A catbonds. This is usually a more liquid type of cat bond transaction and applies to resale of securities. An additional $ 11.5 billion, or 13%, was allocated to secured quota shares or sidecars, and the remaining $ 47 billion was used for non-proportional secured reinsurance or reinsurance.
“The sidecar or production market has actually grown despite past challenges such as surprise loss, loss creep and collateral trapping,” Kumar said. “The increase in quotas was driven primarily by direct bilateral agreements with fundamental investors, rather than syndicated placements with dedicated ILS funds. In these arrangements, past underwriting experience, loss reporting There is a sharp differentiation between cedants, and based on the prompt to release collateral. In addition to the pressure on structural terms and conditions, the real focus is on overrides. The demand for this capacity Currently out of supply.
“The 144A Cat Bond Market is set to issue a record this year. In the first six months of 2021, new bonds of US $ 7.9 billion will be issued through 27 unique transactions with 26 different sponsors. The first fixed income sponsors included reinsurance companies, domestic carriers, and mutual companies and companies. […] More and more reinsurers are looking for this market as an efficient alternative to retreat capabilities by aggregating the industry’s index-based structure. “
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For the non-proportional secured reinsurance market, Kumar increased the use of rated fronts to facilitate participation in the program, contract wording, coverage and exclusion, and timely loss reporting issues. He said he is also focusing on. ..
Schneider said the catbond market is showing “very good momentum” and generally has less losses than secured reinsurance, which continues to be a major form of alternative reinsurance capital.
“Catbond is still a very attractive investment offer for investors. Risk-adjusted returns are still quite appropriate for this category, and of course, diversification is a big driving force for this asset class,” Schneider said. I am. “Also, global reinsurers continue to sponsor catbonds. I think this is good for the market. In the first half of 2021, Everest Re, Ren Re, Aspen, Ariel Re, and new start-ups. There was a transaction from Vantage and therefore it remains a good source of risk management for reinsurers. “
Kumar is also beginning to qualify for environmental, social and governance (ESG) alternative capital and is in high demand from asset managers in many countries around the world. The first Green Cat Bond was sponsored in 2021 and, according to Kumar, was “very popular with investors.” In addition, ESG specialist funds are beginning to see ILS as a potential investment category.
“We anticipate that both traditional and alternative capital will continue to grow and evolve to support individuals, businesses and public institutions facing increasingly complex risks in the world. increase.”