December 11, 2023

Insurance-linked securities (ILS), or alternative capital, is expected to grow into a $150 billion market by 2030, according to investment analyst estimates, but traditional reinsurance capital is expected to grow at a faster rate over the same period Berenberg Bank.

Recently, insurance and reinsurance broker Aon said alternative reinsurance capital (ILS capital) had reached $100 billion by the end of the first quarter of 2023.

This marks a new high and reflects strong growth in the cat bond market through early 2023.

The cat bond market continued to grow, while ILS funds focused on private contracts and mortgage reinsurance also began to report some financing success.

All of this bodes well for continued growth in the near term while the market at least avoids major catastrophic losses.

Berenberg’s analyst team has estimated recent movements in alternative and traditional reinsurance capital.

The forecast calls for alternative capital and ILS capital to grow at a CAGR of 5.80% to reach $150 billion by 2030.

Alternative reinsurance capital ILS growth to 2030

Given the recent growth rate of the catastrophe bond market (according to Artemis, the market is up nearly 10% in the first half of 2023), it seems safe to assume that Berenberg estimates that by the end of 2020, alternative bonds and ILS capital will reach $105 billion. 2023 is a reasonable target for this year.

Beyond the 10% growth in alternatives this year, analysts at Berenberg call for alternative and ILS capital growth of 10% by 2024, 7% by 2025, slowing to 5% over the next two years , and drop to 3% in 2025. ten years.

However, traditional reinsurance capital is seen as having greater growth potential, with Berenberg forecasting a CAGR of 9.90% to $555 billion by 2030.

The starting point for this data is an estimate from reinsurance broker Howden Tiger, so traditional reinsurance capital is lower than some others.

While the CAGR for traditional reinsurance is considered higher, it is worth noting that a significant portion of this will be seen over the next two years and is attributed to a recovery in asset values ​​as well as market expansion. But analysts at Berenberg expect it to still grow faster than alternative capital and ILS after 2024 as growth rates slow.

However, Berenberg’s forecasts suggest that the share of alternative reinsurance capital and ILS in total reinsurance capital will decrease, from around 25% at the end of 2023 to around 21% at the end of 2030.

We believe that its legitimacy from an ILS market perspective depends on two things.

First, how quickly private ILS, mortgage reinsurance, and mortgage retrocession strategies bounce back and start to see more meaningful inflows, which this year’s hurricane season looks set to have a big impact on. A clean year could lead to strong full-year private ILS fund returns from a catastrophe loss perspective, and that seems likely to attract more capital.

Second, are there any innovations in market structure that could spur increased ILS activity, cost-related efficiencies (such as cat bond sponsorships becoming cheaper), and whether ILS fund managers find new incremental ways to catastrophe and non-catastrophe) to find risk sources. strategy is more effective.

Both of these factors are likely to significantly accelerate the growth of the ILS market, helping it keep up with or even outperform the growth curve of traditional reinsurance capital.

Finally, analysts at Berenberg also forecast a CAGR of 6.3% for reinsurance demand, which means that if their forecast is correct, reinsurance capital will grow more than demand, and we all know the historical implications of this for the market and its pricing rules . In fact, they expect capital to outpace reinsurance premium growth by the end of 2025.

The news was less welcome than market capitalization growth. This points to the need for continued efforts to “make the pie bigger”, increase the need for risk transfer, and broaden the breadth of the insurance market in which alternative capital participates, in order to avoid a situation where catastrophe rate spread compression is purely due to capital weighting, rather than capital efficiency .

But analysts do point to some uncertainty about how quickly demand for reinsurance capital will grow and where it is now, saying demand may be stronger than we realize, especially with some players having a tendency to exit and exit Down. Issues of insurability for certain risks and regions are listed.

In a world of increased risk awareness, forecasts for risk transfer and overall insurance capital requirements risk being lower than reality for a number of reasons.

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