Alternative capital inflows stall at around 20% of reinsurance capacity: Fitch

Capital supporting alternative reinsurance has stagnated at between $90 billion and $95 billion in aggregate and represents approximately 15-20 percent of available reinsurance capacity, according to Fitch Ratings.

In a report, titled Insurance-Linked Securities: Stagnated Capacity, Fitch said growth in alternative capital has stalled following a remarkable increase of 14 percent compound annual growth rate (CAGR) from year end 2012 to year end 2018.

Fitch attributed this lack of growth to significant cat bond maturities, limited new sponsor emergence, investor retrenchment in collateralised reinsurance and adverse claims experience on prior transactions.

The trend is unlikely to change for the remainder of 2020 and into 2021, Fitch warned, and will persist until a structural breakthrough narrows the protection gap between economic and insured losses from natural catastrophe events.

“On average, 60–70 percent of all economic losses caused by natural catastrophes are uninsured,” explained Fitch. “This lack of coverage places a huge burden on local municipalities, states and national governments to rebuild and provide other needed resources. Development of alternative reinsurance products to augment traditional coverage would help in risk mitigation and loss absorption.”

Fitch noted that consistent issuance from new and old sponsors in the cat bond market could provide incremental growth, while wider acceptance in Europe and Asia would also add benefits.

“If the sector can produce a 4-5 percent CAGR for the next 10 years, market capacity would increase by approximately $50 billion,” Fitch said.