Global reinsurance capital rebounded to traditional levels at the end of 2020, despite profound challenges caused by the global coronavirus pandemic.

Specifically, capital levels for global reinsurance rebounded to $485 billion by year’s end, A.M. Best noted in its latest report on the sector. Out of that total, $88 billion came from insurance linked securities and $397 billion stemmed from traditional reinsurance capital, according to estimates cited in the report.

An interesting aspect is how one segment of global reinsurance capital compensated for shortfalls of the other. According to A.M. Best, ILS capital dipped by 0.8 percent during the year, but traditional reinsurance capital increased by the same amount.

Resilience

A.M. Best noted that both the ILS and traditional reinsurance markets showed resilience at January 2021 renewals, tapping into enough capital to satisfy demand.

“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,” A.M. Best said in its report.

The ratings agency, citing Aon statistics, pointed out that traditional reinsurers and reinsurance startups raised $23 billion in new capital in 2020.

Heightened Court Action

A.M. Best predicts the risk of more intense arbitration between cedents and ILS managers/traditional reinsurers through the coming months, even though the UK Supreme Court ruled insurers should pay thousands of small businesses for their COVID-19 business interruption claims.

“Although the UK Supreme Court’s ruling on the FCA’s test case deals with UK BI insurance contracts, it may have wider implications in other jurisdictions,” A.M. Best concludes in the report. “Whether any elements of the court’s ruling in the FCA’s test cases can be applied to reinsurance contract is still an open issue waiting to be resolved. Meanwhile, cedents and ILS managers are engaging in a subtle tug-of-war with managers asking cedents to more clearly define their COVID-19-related losses and their rationale for trapping capital.”

Other 2020 trends the A.M. Best report identified:

• The Jan. 2021 renewal period produced lower-than-expected rate increases in the retro, reinsurance and ILS markets.

• There were record cat bonds issued in 2020. A.M. Best counted 46 144A cat bond transactions in 2020, with more than $11 billion in limit transferred to the capital market. Some of the issues replaced some $9 billion of maturities.

The full A.M. Best report is “ILS Market Endures Elevated Catastrophe Activity and Global Pandemic in 2020.”

Source: A.M. Best