A report by Willis Re has found that $35 billion of additional capital is currently flowing into the reinsurance space, with the trend set to accelerate.
The report said that “faced with this wave of new capital, traditional reinsurers have begun to recognise the scale of the challenge to their current portfolios that the new capital represents. While some reinsurers are considering how to respond, others are developing third party capital management propositions to offer their own skills and platforms as fund managers.”
Bermuda players have been successful in developing their alternative expertise, but is clear that additional capital will place pressure on traditional reinsurance rates. One area where traditional reinsurers can look to differentiate their offering however is through their sustainability post-event the report said, but it is clear that the industry is being obliged to adapt to a new norm.
Not since Andrew
The level of additional capital flooding the market is also affecting ILS pricing. Aon Benfield’s latest Reinsurance Market Outlook found that clients renewing capacity saw their “risk adjusted pricing decrease by 25 to 70 percent for peak US hurricane and earthquake exposed transactions”.
The report added that “the ILS market is now offering the lowest cost of reinsurance for peak perils witnessed since Hurricane Andrew”. Additional capital is evidently making the ILS proposition more attractive for primary players, with the cost of ILS transactions having traditionally been seen as a hurdle to entry.
With capital market investors still keen to add diversifying plays to their portfolios, ILS remains an attractive prospect for pension fund, hedge fund and high net worth investors, with evident ramifications for the reinsurance industry. However, there may yet come a tipping point where falling ILS pricing and improving capital market returns elsewhere, may encourage investors to consider pastures new. It remains to be seen how ‘sticky’ current investor interest will be.
Willis Re, ILS, Aon Benfield, pricing, reinsurance