Reinsurers are increasingly relying on third-party capital to support their retrocession needs, in which they transfer risks they have assumed to other counterparties.

According to a report from S&P Global Ratings reinsurers have ceded about 50% of their exposures at a 1-in-250 return period through collateralized instruments, such as insurance-linked securities (ILS) in 2021. About 15% of total reinsurance capital is sourced through ILS issuances, while the share is “increasing significantly” within the retrocession market, the report says.

S&P said it expects ILS to increase its market share over the next few years as new issuances address new risks such as cyber, climate change, and environmental, social and governance (ESG).

“The more peak exposures the reinsurance market transfers to a broad range of ILS investors, the better for the stability of the system and the growth of the market,” said S&P Global Ratings credit analyst Maren Josefs.

In terms of returns, this year remains uncertain. The authors note that given the occurrence of fresh catastrophes, 2021 natural catastrophe losses are likely to exceed reinsurers’ budget expectations yet again.

According to Swiss Re, the first six months of 2021 delivered the second-highest natural catastrophe-insured losses ($40 billion versus a 10-year average of $33 billion), with Winterstorm Uri in Texas in February being the costliest event ever recorded for the peril of severe convective storms and winter storms.

“Despite these setbacks, we expect investor interest in the ILS asset class to remain strong, as long as the market stays disciplined. We therefore expect the ongoing flight to good quality ILS asset managers to continue,” S&P analysts wrote.

Source: S&P Global report, Reinsurers’ Use Of Insurance-Linked Securities Is Set To Increase Amid Rising Catastrophe Losses“