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Growth of alternative reinsurance capital slows but will bounce back soon: Aon

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Growth of alternative reinsurance capital slows but will bounce back soon: Aon

Growth in alternative reinsurance capital has slowed following two years of heavy catastrophe losses, but is set to pick up again, insurance broking group Aon PLC said in its latest reinsurance market outlook.

Aon said Jan. 10 that growth in alternative capital — money backing reinsurance risk that comes from capital markets investors rather than traditional reinsurance companies — is slowing because the continuing entry of new funds is being offset by worse-than-expected claims from past events and some investors looking to pull their money from the market. That analysis chimes with what fellow broker JLT Re found in its report on the Jan. 1 renewals.

But Aon noted that only "a relatively small number" of investors were heading for the exit and said it expects the previous rate of growth in alternative capital to resume "once this area of the market has fully digested the losses incurred over the last two years."

The broker expects longer-term investors to remain committed to the reinsurance market, noting that many had made good returns over time and that the strategy of investing in insurance risk to diversify portfolios "remains valid." It pointed out that Dutch pension fund manager Pggm Coöperatie U.A., one of the largest investors in the sector, had invested $600 million in Vermeer Re, a joint venture with RenaissanceRe Holdings Ltd. that writes U.S. property-catastrophe business.

Aon said 2018 insured catastrophe losses were estimated at $85 billion — 47% higher than the $56 billion average between 2000 and 2017. Aon's figure slightly outstrips the $80 billion in insured losses estimated by Munich Re and the $79 billion figure from Swiss Re.

Aon said the 2018 losses followed a $147 billion tally in 2017, giving an aggregate of roughly $230 billion over the past two years. Losses in 2018 were the fourth-highest on record since 1980, behind only 2005, 2011 and 2017.

Despite the high levels of claims, however, Aon said reinsurance buyers were able to buy cover "at accretive cost of capital terms" at the Jan. 1, renewals as the supply of reinsurance capacity continued to outstrip demand. The broker noted that global reinsurance capital fell to $595 billion as of Sept. 30, 2018, from $605 billion at the end of 2017, but alternative capital grew to $99 billion from $89 billion.

Aon said there had been a "slight increase" in demand for traditional products and business lines, which was driven by regulatory requirements, attractive conditions for buyers and recent losses in areas not considered to be peak catastrophe zones.