Just a few weeks ago, analysts at investment bank Berenberg estimated that as much as $8 billion in alternative reinsurance and insurance-linked securities (ILS) capital had been raised so far this year; $11 billion.
As a result, analysts now believe that since Hurricane Ian hit last year, alternative and ILS capital has flowed into the insurance and reinsurance market at around $15 billion.
However, despite some early signs of an easing of the reinsurance capital supply crunch, analysts do not see alternative capital raising and ILS market inflows as “enough to derail the strong rate momentum”.
When we reported the analysts’ earlier numbers, Berenberg said about $8 billion in flows had occurred, and we estimated that about half of this year’s flows would go to the cat bond market.
New data from Berenberg, based on conversations with market participants on the traditional and alternative reinsurance capital sides, suggests that capital flows to other private ILS and alternative reinsurance structures have increased, likely at mid-year renewals.
However, even with these flows, we are currently not hearing any concerns related to excess capital, suggesting that analysts are correct that any funds raised are simply filling capacity gaps.
In addition, the catastrophe bond market has higher maturities, and on the private ILS side of mortgage reinsurance and retrocession strategies, participants are still replacing and recovering stranded capital in some cases, so actual deployable amounts are not expected to will increase substantially so far.
“The new capital only relieves some of the pressure from increased reinsurance demand,” analysts at Berenberg said.
Adding, “if we have a super ‘clean’ calendar year, the pricing risk will be higher.”
With capital not yet reaching levels of oversupply, analysts believe reinsurance pricing may remain elevated for longer and are optimistic about the outlook for a hard market that lasts until 2024.
Continued demand growth is expected to be a key factor, while some insurers are shying away from natural catastrophe hazards and climate risks, leaving more capacity gaps to fill.
“In our view, unless significant capital flows into the industry, not only will the protection gap continue to widen, but pent-up demand from existing businesses due to inflation and increased risk exposure will be difficult to meet. This suggests that pricing of primary insurance and reinsurance needs to Maintaining a higher level for a longer period of time can attract capital to return.” The analyst said.
Also read: Alternative capital has raised about $8 billion so far in 2023, analysts said. Catastrophe bonds could reach upwards of $4 billion.