MOODY'S: Alternative capital market poised to resume growth on higher reinsurance pricing

8 September 2022 — Daniela GHETU
"With reinsurance pricing continuing to move up, alternative capital capacity is poised to break out above the USD 100 billion level and resume its growth trend as higher pricing is likely to attract additional capital inflows from institutional investors," a recent analysis by Moody's concluded.

"Over the past 15 years, alternative reinsurance capital - capital from investors in the form of collateralized reinsurance, catastrophe bonds and reinsurance sidecars - has grown from approximately USD 22 billion at year-end 2007 to around USD 95 billion at Q2 2022, and currently constitutes about 15% of total reinsurance capital," the report reads.

As it became an ordinary tool into reinsurers' risk and capital management frameworks, alternative capital is extensively used by reinsurers to lower their own total cost of capital, manage peak risk exposures, improve risk-adjusted returns and enhance their overall competitive positioning in the global reinsurance sector.

Moody's believe that "the continued positive pricing momentum for reinsurance will help restart growth for this key source of risk transfer capacity" despite the relative stagnation the alternative capital throughout the past five years because of the poor returns.

Here are the main highlights of Moody's report:

  • Alternative capital market in transition as several years of poor returns stunt sector's growth. Following a decade of rapid growth after the financial crisis, the alternative capital market's capacity has essentially been flat since year-end 2018. Above average catastrophe losses between 2017 and 2021 have resulted in poor returns, causing some investors to reevaluate their commitment to the asset class.
  • Aggregate retro capacity shrinks as a result of losses and trapped capital. Over the past several years, collateralized aggregate retrocessional (retro) coverages have been hit hard by the combination of increased catastrophe event frequency and large losses from secondary perils such as wildfires and floods. Going into the January 2022 renewals, an estimated $15 billion to $20 billion of alternative capital was "trapped," resulting in an estimated 75% reduction in ultimate net loss (UNL) aggregate retro capacity.
  • Reinsurers turn to cat bonds and sidecars to manage catastrophe risk exposures. Given the limited capacity and high cost of aggregate retro coverage in the collateralized reinsurance market, reinsurers have turned to catastrophe bonds for retro capacity. Since June 2021, reinsurers have obtained more than $2.8 billion of retro capacity through 15 cat bond transactions. Likewise, some reinsurers have been shifting more catastrophe risk exposure to third-party investors in affiliated sidecar and joint venture vehicles.
  • Alternative capital market poised for growth on higher reinsurance pricing, strategic benefits. With US property cat reinsurance pricing up more than 50% from the 2017 lows, the market is poised to resume its growth trend. Higher pricing is likely to increase demand from investors, while reinsurers will continue to increase their utilization of alternative capital due to the strategic and financial benefits it provides.
The full, original Moody's report is available for download here, courtesy to the rating agency.