Global reinsurance capital – comprising traditional and alternative capital – fell 2 percent in 2018 to $595 billion from $605 billion in 2017, remaining resilient in the face of insured natural catastrophe losses of $230 billion over the two-year period, according to a report published by Aon’s Reinsurance Solutions business.

Traditional reinsurance capital declined by 4 percent in 2018 to US$496 billion, driven in part by rising interest rates and a stronger U.S. dollar. On the other hand, alternative capital rose 11 percent last year to $99 billion, an increase of US$10 billion over 2017, said the report titled “Reinsurance Market Outlook – January 2019.”

While traditional reinsurers continue to report strong risk-adjusted capitalization and have been able to trade through recent natural catastrophes without capital impairment, the impact has been more significant for the alternative capital sector, the report noted.

“Many [capital market] 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,” the report continued. “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.”

While “lost collateral” is capital that has suffered loss due to an event, “trapped collateral” can occur when a cedent does not know the full extent of its losses and will thus have to wait to allow those losses to fully develop until the end of the contract period, which is likely to be year-end.

Nevertheless, overall reinsurance supply continues to outstrip demand, despite a slight increase in global reinsurance demand driven by regulatory requirements, attractive market dynamics for buyers and recent losses in non-peak territories that has led buyers to seek more robust coverage for these perils.

Emerging or Evolving Risks

In addition to the traditional reinsurance market, a number of emerging or evolving risks have seen growth in buying and increased analytics investment, which Aon expects will translate to increases in risk transfer. A few of these risks include flood, cyber, drones and the sharing economy.

Drilling down into the flood peril, as an example, the report sees opportunities for re/insurers with U.S. flood risk via 1) reinsurance of the National Flood Insurance Program (NFIP) and by 2) providing private coverage for flood risks that are uncorrelated with the NFIP.

Recent catastrophe events involving flood damage in the U.S., such as Hurricanes Harvey, Irma, Florence and Michael, highlight the gaps that exist in available flood models but provide opportunities for learning and improvement, the report continued.

“Carriers wanting to develop private flood products and bring such tools to market, especially those that can demonstrate proficiency in risk selection and pricing, will generally find reinsurers and ILS investors receptive,” added the report.

Other statistics detailed in the Aon report include:

• Global catastrophe losses in 2018 losses are currently estimated at US$85 billion, compared to losses of US$147 billion in 2017, which was a near record. Last year’s catastrophe losses were 47 percent higher than the 2000-2017 average of US$56 billion.
• Payouts by the private insurance industry and government-sponsored programs in 2018 were the fourth-highest on record when comparing historical annual losses on an inflation-adjusted basis.
• Catastrophe bond issuance totaled US$9.7 billion in 2018, making it the second most active year on record.
• Six of the ten most destructive wildfires on record in California were registered during a 16-month stretch from July 2017 to November 2018. These six fires are estimated to have cost the insurance industry nearly US$32 billion in claims, a combined loss total would rank as one of the top five insured loss events ever recorded for any peril.

The report also highlights the latest in rating agency and regulatory updates including S&P’s recent criteria proposals that may affect capital management strategies, Moody’s plan to incorporate of cyber exposure in its ratings, and the ramifications of A.M. Best’s building block rating assessments rolled out in October 2017.

*This story appeared previously in our sister publication Insurance Journal.