The growth of alternative reinsurance capital abated in 2018 for the first time since the global financial crisis, according to early analysis by reinsurance broker JLT Re.
The broker said the growth slowdown was consistent with hardening prices seen in the retrocession market at the Jan. 1, 2019, renewals as capital markets players pulled back in response to what they saw as "disappointing" returns throughout 2018, continued claims deterioration from 2017's Hurricane Irma and the latest round of catastrophe losses in 2018.
Alternative capital refers to reinsurance and retrocession products backed with money from capital markets investors rather than traditional reinsurers, and includes insurance-linked securities, or ILS, collateralized reinsurance and industry loss warranties.
The market was surprised a year ago when investors were undeterred by heavy natural catastrophe activity in 2017 and replenished capital that was either lost or trapped as a result of the disasters. Trapped capital occurs when the ultimate claims bill from a catastrophe is still uncertain, and so investors' money cannot yet be released and redeployed.
This rapid capital reload was one of the factors that depressed reinsurance price increases at the Jan. 1, 2018, renewals and subsequent key renewal dates in 2018. But JLT Re noted in its report on the Jan. 1, 2019, renewals that the quantum and timing of the 2018 losses meant that investors' money was trapped again, and that investor appetite "softened" in the fourth quarter of 2018, having moderated throughout the year because of lower-than-expected returns, and claims deterioration from the 2017 events.
The broker said some ILS funds faced a tough renewal season as "a series of redemptions and a difficult round of fundraising" followed the 2018 losses, "with lost or trapped capital not being replenished to the same degree as last year."
Fellow reinsurance broker Willis Re noted in its renewals overview that the ILS market is facing a "more comprehensive test" and that some ILS products, mainly those providing aggregate catastrophe and retrocession cover, "have performed poorly for investors, thereby resulting in less available capital." Willis Re also pointed out that the variation in ILS funds' exposures to different product types "is starting to impact the ability of many funds to attract new investors."
Rising to the challenge
However, Willis Re also said that although some funds were finding it tougher to attract new investors, its recent global ILS survey showed that "this is likely to be a challenge that the industry overcomes" because long-term interest in ILS, particularly from pension fund managers wanting to diversify their portfolios, remains robust.
And although the withdrawal of some alternative capacity contributed to double-digit price increases in the retrocession market at Jan. 1, JLT Re said reinsurance capacity was still plentiful. It noted that "strong competition" ensured that, although late, reinsurance deals were "completed in good order for the most part and capacity was only pared back in areas where major losses occurred or where return hurdles were not met."
It added: "This is a market which has clearly matured since the days when large catastrophes created massive price volatility."