Alternative capital set for further growth in 2018

Alternative capital rose by $8 billion to $89 billion in 2017 and is expected to grow further in 2018 after a strong first quarter, according to Aon Benfield’s April 2018 Reinsurance Market Outlook.

Capital markets investors continued to show strong appetite for insurance risk, both before and after the third quarter 2017 hurricanes, the report notes.

The catastrophe bond market has had a strong first quarter in 2018, continuing momentum established in 2017, Aon Benfield says. The range of geographies and perils covered is broadening and a growing number of jurisdictions are enabling ILS issuance: London has become a mainstream onshore alternative, having recently passed legislation that will allow it to develop as an insurance-linked securities (ILS) centre. Singapore is bidding to become a hub for ILS activity in Asia, announcing in November 2017 that its regulator would fund 100 percent of the upfront costs incurred in issuing catastrophe bonds locally. Aon Benfield, therefore, expects to see further growth in the alternative capital market during 2018.

Passing the test posed by the 2017 catastrophe events has dispelled any remaining doubts about the sector’s permanency, boosting the confidence and acceptance of both investors and the broader marketplace, the report says.

Alternative capital showed significant growth over the course of 2017. Strong inflows in the first half of 2017 coincided with record volumes of catastrophe bond issuance. Second half losses from natural disasters are estimated at $15 billion, mostly in retrocession, lower attachment point reinsurance and aggregate covers, with another $5 billion of collateral trapped. Most of the capital lost or trapped has since been replaced. Many investors previously enjoyed excellent returns and losses in 2017 generally fell within published risk tolerance ranges. In addition, the prospect of improved returns in the classes and territories most affected has attracted new participants, the report notes.

Continued growth in alternative capital is translating into growing influence in the market, Aon Benfield states. The willingness of investors to reload mitigated upward pressure on retrocession pricing at the January renewals. Established sidecars were renewed and several new vehicles were formed, as traditional reinsurers looked to grow their business positions, while controlling their net exposures, Aon Benfield notes.

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