Dedicated cat funds entering reinsurance space

There is a product that has exploded in growth since 2010 and is now the size of the cat bond market, says a recent Sigma report.

Dedicated cat funds entering reinsurance space

Risk Management News

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There is a product that has exploded in growth since 2010 and is now the size of the cat bond market, says a recent Sigma report.

The amount of alternative reinsurance capital-backed capacity in the global reinsurance market has increased by 80 per cent since 2010, says an industry expert from Swiss Re, making it the fastest growing product in the alternative capital space.

“Many of the dedicated catastrophe investment funds, once focused on catastrophe bonds and securitization as investments, are now entering the collateralized reinsurance space,” says Martin Bisping Swiss Re’s head of non-life risk transfer. “Collateralized reinsurance is now the single fastest growing product in the alternative capital space, now around the size of the cat bond market.”

The Sigma report from Swiss Re examines the global reinsurance market for 2014 and 2015 - particularly the number of key trends and overall macroeconomic factors expected to impact on the reinsurance market.

“Money has been flowing into dedicated cat bond funds, but the supply of cat bonds has not kept pace with demand,” observes Bisping. “Thus, the funds have placed the additional capacity into collateralized reinsurance contracts. Because cat bond spreads have come down substantially, funds have found it necessary to put capacity into more risky layers with higher premium income.”

Indemnity capacity has become widely accepted, as sponsors and cedents look to eliminate basis risk. As a result, Bisping says that the market in industry loss warranties (ILW’s) has shrunk significantly. He also says that some sidecars have been scaled back, as a result of the softening across the catastrophe reinsurance market. (continued.)

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The increasing interest from capital markets investors in the reinsurance space has led to heightened awareness of its impact on the market.

“With U.S. property catastrophe reinsurance heavily influenced by alternative capital and instruments such as catastrophe bonds,” says Bisping, “sidecars and industry loss warranties, as well as investors increasingly backing reinsurance contracts directly in a collateralized manner, the market has seen sharp growth.”

Swiss Re shared some data on the size of the alternative reinsurance capital market, which it believes has reached $45 billion in size this year. The ILS and alternative reinsurance capital market has grown strongly since 2011, increasing by around 80 per cent from $25 billion to the $45 billion it sits at today, according to Swiss Re.

Currently, Swiss Re says the $45 billion of alternative reinsurance capacity equates to around 11 per cent of the global catastrophe excess of loss market and about 17 per cent of the U.S. market.

These levels are now higher than the percentages seen post-Katrina, demonstrating that the alternative reinsurance capital market has outpaced the growth of the overall reinsurance market.

At a recent media event, Martin Bisping, Swiss Re’s Head of Non-Life Risk Transfer, explained some of the trends being seen in the alternative reinsurance capital market.

Bisping explained that many of the dedicated catastrophe investment funds, once focused on catastrophe bonds and securitization as investments, are now entering the collateralized reinsurance space. Collateralized reinsurance is now the single fastest growing product in the alternative capital space, now around the size of the cat bond market. (continued.)

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Swiss Re notes in the report; “Money has been flowing into dedicated cat bond funds, but the supply of cat bonds has not kept pace with demand. Thus, the funds have placed the additional capacity into collateralized reinsurance contracts. Because cat bond spreads have come down substantially, funds have found it necessary to put capacity into more risky layers with higher premium income.”

Indemnity capacity has become widely accepted, as sponsors and cedents look to eliminate basis risk. As a result, Bisping said that the market in industry loss warranties (ILW’s) has shrunk significantly. Bisping also said that some sidecars have been scaled back, as a result of the softening across the catastrophe reinsurance market.

Alternative and third-party reinsurance capital remains focused on areas of the global reinsurance market where the margins are high and the barriers to entry are low, according to Swiss Re. By low barriers, Swiss Re means short-tailed, transparent and well modelled risks. It estimates that 70 per cent of alternative capital is held in U.S. property catastrophe risks, mostly U.S. wind and earthquake, with another 30 per cent in retrocession, but says it is not well established elsewhere.

Swiss Re says that while growth is as good as assured for the alternative reinsurance capital market, how fast that growth is remains to be seen. It does believe that further market share will be lost in the U.S. peak catastrophe risk markets, but does not expect the growth seen in the last two years to continue at that pace.
 

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