Convergence capital expected to rebound after losses settle but investors will be cautious: S&P
A new report by S&P Global Ratings suggests that alternative reinsurance or third-party capital is likely to remain 'key' in the global market as reinsurers grapple to stay competitive following large losses in the recent years.
Although the influx of convergence capital has fallen for the first time in a decade, reflecting two and a half years of negative returns and trapped collateral from large natural catastrophes, the ratings agency believes that new capital will continue to enter the market — albeit at a slower rate.
According to the report, the new commitments have tended to favour insurance-linked security (ILS) funds.
"It's fair to say that the recent losses have put investors' focus on seeking out the best available returns," said S&P. "Indeed, the retrocession market has already hardened in 2019 and could further do so at the January 2020 renewals."
However, the agency noted that investors have been cautious in entering the market or reloading.
"This is not surprising given it follows the two worst-performing years since the inception of the Eurekahedge ILS Advisers index. Despite a benign period of catastrophe-insured losses so far in 2019, this year also hasn't started well for the index constituents. Further loss creep and mark-to-market catastrophe bond losses due to higher prices for new issuance have been the main culprits."
According to Aon's estimates, about $15 billion of collateral is still trapped in contracts affected by losses from recent natural catastrophe events that could take another two years to settle, putting continued downward pressure on investors' returns.
Even in 2019, several losses continue to develop adversely across the whole industry, such as of Typhoon Jebi, which increased from an initial estimate of $3 billion-$7 billion to currently about $15 billion. During the April 1, 2019 Japanese renewals, reinsurance prices were up 15% to 25%, a somewhat subdued figure given the magnitude of the losses and the associated loss creep.
S&P noted that ongoing enhancements in models and adjustments in contract language (such as certain peril exclusions) are expected to encourage further growth once recent losses have been fully settled.
"Many third-party capital investors have made good returns over the long term, and the argument for investing in insurance risk to achieve portfolio diversification remains valid. For cedants, this means that there is capacity for the right risks at the right price," it said.
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