Reinsurance market altered by insurance-linked securities: S&P

Insurance-linked securitization has “transformed” the reinsurance market, according to a report issued Tuesday by S&P Global Ratings.

The report, How Reinsurers Have Learned To Align Third-Party Capital With Their Needs, says that insurance-linked securitization, which allows third-party capital to enter the reinsurance sector, has had the greatest effect on the catastrophe space.

The capacity, however, is also looking for new homes in places like casualty lines or life reinsurance, according to New York-based S&P, though investors largely have yet to embrace such uses, the report said.

The bulk of what is now being called “convergence capital” will be deployed in collateralized reinsurance, according to the report, although instruments such as catastrophe bonds and sidecars will also play a role.

Such ample capacity helped limit the upside on price increases and rate hikes at Jan. 1 reinsurance renewals, the report said, in the wake of 2017’s severe catastrophe losses, which S&P pegged at $138 billion.

One concern about such convergence capital has been that capacity would recede in the face of major losses, but the report asserts the abundance of funds available even after the 2017 losses dispels this fear.

“Even the natural catastrophe losses of 2017 have not dented investors' enthusiasm for the various instruments that come under the banner of alternative or convergence capital,” S&P said in a statement issued with the report.

“Many observers had assumed that investors who entered the ILS market during the recent string of benign catastrophe years might take fright when investment returns turned negative. However, we saw no capital flight following the negative investment returns that followed the 2017 hurricanes as losses were within investors' expectations.”