Global reinsurance capital dipped by 2 percent to $595bn in the nine months to 30 September 2018, new figures from Aon show, with traditional market capital decreasing by an even greater degree during the period.
According to the broking giant, global reinsurance capital dropped from $605bn at the start of 2018 to $595bn come the end of last year’s third quarter. As Aon explained, traditional capital underwent a reduction of 4 percent during that timeframe, but that decrease was partially offset by further commitments to the alternative capital space. That sector saw committed capital grow by 11 percent, equal to $10bn, during the nine months to $99bn as of 30 September 2018.
“Global reinsurer capital remained resilient in the face of insured natural catastrophe losses aggregating to around $230bn over the last two years,” Aon said, adding: “Excess reinsurance capacity continues to exist, despite an increase in demand for reinsurance solutions on a global basis.”
In its latest Reinsurance Market Outlook report, Aon highlighted how the proportion of those losses accruing to reinsurers has been relatively low. Indeed, the broker said the proportion may be no more than 25 percent given the profile of the underlying events and the high retentions held by many large primary carriers. At the same time, the reinsured aspect of the losses was spread across a far broader pool of investors than in the past.
Despite the continued severe catastrophe losses, Aon said the traditional market has been able to trade through the events without capital impairment. However, there has been a far greater impact on the alternative capital market.
“Many investors in the final quarter of 2017 have experienced some combination of lower than expected pricing, ‘creep’ on 2017 events and further losses in 2018,” Aon said in its report.
“Significant amounts of collateral have become trapped and the ongoing commitment of newer participants is being tested. This is affecting areas most dependent on this form of capacity, notably the retrocession market.”
Headline growth in the alternative capital sector, Aon noted, is slowing. New funds continue to enter the marketplace, but those arrivals are being partly counterbalanced by loss development on past events and redemption requests from a small number of investors who are looking to withdraw.
“Aon expects the previous rate of growth to resume once this area of the market has fully digested the losses incurred over the last two years,” the broker said.
It added: “Many long-term investors have made good returns over time and the strategy of investing in insurance risk for diversification purposes remains valid.”
One notable example is Dutch pension fund manager PGGM and its decision to commit $600mn to Vermeer Re, a joint venture with RenaissanceRe focusing on risk-remote layers in the US property catastrophe space.