Alternative capital growth in 2018 abated for the first time since the global financial crisis, according to reinsurance broker JLT Re.
While traditional capital increased $2 billion in 2018 to an estimated $257 billion, JLT Re showed alternative reinsurance capital levels were flat at $91 billion. According to the latest figures from the Bermuda Monetary Authority, Bermuda's alternative capital business accounted for 58 percent - or $51.9 billion - of the global total at year-end 2017.
JLT Re said this is consistent with the tightening observed in the retrocession market as some investors pulled back allocations due to what were perceived as disappointing returns throughout the year, continued loss creep from Hurricane Irma and another series of costly catastrophe losses in 2018.
The broker suggested that capacity constraints in the retrocession market in fact dominated the narrative around the January 1 renewals. A sizeable portion of retrocession capital - a bulk of which is provided by third-party investors- was trapped for a second consecutive year due to the quantum and timing of 2018 cat losses, JLT said.
Against a backdrop of investor appetite softening in the fourth quarter due to lower-than-expected returns and loss deterioration from 2017 events, ILS funds faced a more challenging renewal environment, with claims mounting from Hurricane Michael and the California wildfires, both of which were $10 billion plus events, as well as Typhoon Jebi, the strongest typhoon to hit Japan in 25 years.
The overall dedicated global reinsurance capital - including alternative capital - was $348 billion in 2018, up from $346 billion in 2017.
“Sustained capital inflows have offset mounting pricing pressures to bring relative stability to the reinsurance market over the last several years," said David Flandro, global head of analytics at JLT Re. "Record levels of dedicated sector capital at year-end 2018 once again helped ensure continued, plentiful capacity across most lines at 1 January 2019. A small portion of excess sector capital was nevertheless absorbed in 2018 by sizeable insured catastrophe losses in the second half of year, a reduction in third-party deployable capital, higher demand for reinsurance and a renewed focus on underwriting discipline, as shown, for example, by reduced stamp capacity and higher capital requirements at Lloyd’s.”
Flandro concluded: “Loss experiences and the macroeconomic environment will play an important role in shaping the reinsurance market in 2019. Another large-loss year could test the limits of carriers’ capital resilience, as well as investors’ appetite for reinsurance at a time of capital market volatility. Carriers’ balance sheets could also come under additional strain as the economic cycle shows signs of shifting for the first time since the immediate aftermath of the financial crisis. Reserving trends and asset leverage remain key sector drivers. After a prolonged period of low yields and disinflation, the spectre of sudden movements in interest rates and asset prices bring important supply implications.”
JLT Re, ILS, Alternative Capital, Report, Bermuda