Reinsurance capacity robust in mid-year renewals despite challenges
Reinsurance capacity was adequate and available in the June/July renewals, despite a difficult start to the quarter due to the challenges of COVID-19 and a reduction in global reinsurance capital at the end of the first quarter, according to Aon’s ‘Reinsurance Market Outlook’ covering June/July 2020.
The report noted that demand remained relatively stable as many governmental-related covers were pulled from the market offset by some insurers electing to secure additional capital to reduce volatility heading into a predicted, above average hurricane season.
“Despite different market dynamics than in many past renewals, insurers were able to secure needed limit in the face of already reported COVID-19 related claims, future uncertainty regarding macroeconomic trends and premium volume impact from COVID-19 for the longer term,” the report said.
Q1 total global reinsurance capital stood at $590 billion, a decrease over 2019 of $35 billion, or 6 percent. This result was comprised of a 6 percent drop in traditional reinsurance and a 4 percent drop in alternative capital ending the quarter at $499 billion and $91 billion, respectively.
While traditional reinsurers saw impacts of COVID-19 that affected capital results at the end of Q1, alternative capital remains impact by approximately $15 billion in trapped capital.
Traditional equity capital fell by 6 percent, or $31 billion, to $499 billion, reflecting the impact of COVID-19 on both sides of the balance sheet. Risk-based capital adequacy has declined, but solvency ratios generally remain strong across the reinsurance sector. Partial recovery of the asset side losses is expected in the second quarter, while claims relating to the pandemic are expected to ramp-up.
Headline assets under management in the alternative capital sector are estimated to have fallen by 4 percent, or $4 billion, to $91 billion. At least $15 billion of collateral is believed to be trapped as a result of recent major losses, now including COVID-19. The reduction in the amount of capacity actually available for deployment continues to affect the retrocession market in particular.
The report noted: “Recent years have represented a significant test of investor appetite for insurance risk. Many supporters of sidecars and collateralized reinsurance transactions have experienced significant losses, with returns further diluted by the trapping of collateral.
“Concerns around model credibility, loss creep and climate change have caused some to leave and others to pause, resulting in an overall reduction in assets under management. Some new inflows of alternative capital have been seen, but they have tended to favor established managers with strong track records.”
It said the perceived lack of correlation with broader capital markets remains the main driver, with the expectation of higher returns now added to the mix. However, this rationale may be challenged if investors see additional collateral becoming trapped as a result of COVID19.
“One bright spot is the property catastrophe bond market, where the liquidity of the product and the peril specific nature of the coverage continues to attract strong interest. Around $6.5 billion of limit was placed in the first half of 2020, nearly matching the maturities. In addition, a lot of activity has been seen in the industry lost warranty (ILW) market, given the more limited availability of ultimate net loss coverage.”