Despite extraordinary losses in 2020, the insurance-linked securities (ILS) and traditional reinsurance markets demonstrated their resilience at the January 2021 renewals, raising capital back to pre-pandemic levels, according to the new Best's Market Segment Report: "Insurance-Linked Securities Market Weathers Elevated Catastrophe Activity and Global Pandemic in 2020".

Six broad issues came into focus in 2020:

• The resilience of the ILS and traditional reinsurance markets, as illustrated by new capital raised by both markets
• Trapped capital, including preemptive trapping (trapping capital without submitting specific reserves for damages as the pandemic remains an ongoing event)
• The possibility of heightened arbitration between cedents and ILS managers/traditional reinsurers despite the UK Supreme Court ruling on the Financial Conduct Authority's (FCA) business interruption (BI) test case
• Lower-than-expected rate increases in the retro, reinsurance, and ILS markets during the January 2021 renewal period
• Changes in pricing and terms and conditions during the January 2021 renewal period and
• Record cat bonds issued in 2020

The ILS and traditional reinsurance markets, anticipating rate increases, successfully raised capital for the January 2021 renewals despite uncertainty about losses from the COVID-19 pandemic. Losses incurred from a significant series of small to medium-sized natural catastrophes and the economic uncertainty caused by the COVID-19 pandemic pressured insurers in these markets.

Natural catastrophe losses for 2020 reached USD 76 billion, according to Swiss Re, much higher than the 2019 insured loss of USD 54 billion and slightly higher than the 10-year average insured loss of USD 71 billion.

According to the Report, the global reinsurance capital returned to its pre-pandemic level of USD 485 billion at year-end 2020, comprising USD 88 billion of ILS capital and USD 397 billion of traditional reinsurance capital, according to estimates from AM Best and Guy Carpenter. Additionally, the ILS market saw a record year in 2020 for catastrophe bond issuance, driven predominantly by a glut of maturities and a host of new issuers. Given the level of scheduled maturities this year, AM Best believes cat bond issuance in 2021 could reach or eclipse 2020 levels.

The global reinsurance market averted a dislocation due in large part to an influx of new capital, less capital trapping, and the delayed reckoning of COVID-19-related losses.According to Aon, USD 23 billion of new capital was raised by traditional reinsurers and reinsurance startups in 2020. Motivations for raising capital include a desire to exploit a hardening market (including property cat, specialty, and direct and facultative property lines), shoring up capital bases to meet regulatory and rating agency capital requirements, and weathering the uncertainty of COVID-19 loss estimates.

Source: AM Best