shutterstock_293228876_gil-c-1
shutterstock/Gil C
14 September 2021Insurance

Alternative reinsurance capital no longer a ‘naive’ capacity: Moody’s

Alternative capital, once referred to by traditional reinsurers as “naive” capacity, is now extensively used by reinsurers to lower their own total cost of capital, manage peak risk exposures, improve risk-adjusted returns and enhance their overall competitive positioning in the sector, says  Moody’s Investors Service.

The alternative capital market experienced rapid growth between year-end 2011 and year-end 2017, becoming a “firmly embedded and growing” component of reinsurers’ risk and capital management.

According to Moody’s latest report, alternative reinsurance capital, in the form of collateralised reinsurance, catastrophe bonds and reinsurance sidecars, grew from approximately $28 billion at year-end 2011 to around $97 billion at Q2 2021. It now constitutes roughly 15 percent of total reinsurance capital.

This additional supply of risk capacity drove pricing for US property catastrophe reinsurance, which was historically reinsurers’ most profitable line of business, down by more than 30 percent during this period, it noted.

However, in order to mitigate the impact of eroding profit margins, reinsurers' business models evolved to increase their utilisation of retrocessional reinsurance as a way to lower their own total cost of capital, manage their own risks and optimise their risk-adjusted return profiles.

From a credit perspective, Moody's views this increase largely as a positive development, but highlighted a number of significant risks that need to be carefully managed.

The biggest risk is the inability to maintain access to sufficient retro capacity to support clients following very large catastrophe losses or if capital markets seize up, forcing a retrenchment of the business that would disrupt and damage the core reinsurance franchise, it noted.

Did you get value from this story?  Sign up to our free daily newsletters and get stories like this sent straight to your inbox.

Already registered?

Login to your account

To request a FREE 2-week trial subscription, please signup.
NOTE - this can take up to 48hrs to be approved.

Two Weeks Free Trial

For multi-user price options, or to check if your company has an existing subscription that we can add you to for FREE, please email Elliot Field at efield@newtonmedia.co.uk or Adrian Tapping at atapping@newtonmedia.co.uk


More on this story

Insurance
20 September 2021   The sector's premium growth is flat, but prospects remain healthy.
Insurance
15 September 2021   Lower COVID-19 claims and increasing pricing have improved the outlook for reinsurers, but catastrophes and claims inflation leave their earnings vulnerable, Moody’s Investors Service said today. Robust levels of capitalisation are the primary reason it continues to rate the sector as stable.
Insurance
13 September 2021   Buyers' survey indicates reinsurance price growth to slow to low single digits.