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Alternative insurance capital capacity reaches $62 billion: Aon Benfield


January 5, 2015   by Canadian Underwriter


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Severe thunderstorm was the costliest peril in 2014 for the global insurance industry, global reinsurer capital reached US$575 billion during the third quarter and non-traditional capacity is now nearly US$62 billion, Aon Benfield stated in its Reinsurance Market Outlook for January.

In the third quarter of last year, global reinsurer capital was up $5 billion, over the prior quarter, to $575 billion, stated Aon plc’s Aon Benfield unit. All figures are in United States currency.

“Non-traditional capacity” — which includes catastrophe bonds, collateralized reinsurance, sidecars and industry loss warranties — increased by nearly 25% to $61.9 billion in 2014, Aon Benfield reported.

“Transparent structures of (insurance-linked securities) transactions, low correlation with financial markets and relatively attractive returns have been the main reasons alternative reinsurance capital has grown from a nascent industry in the 1990s to a global network of capital managing USD62 billion in assets today,” Aon Benfield stated in the outlook. “During this expansion, cedents have been able to expand coverage and terms, as well as enter into strategic relationships with alternative capital providers via collateralized sidecars.”

Investors in alternative capital “have achieved annual returns” of about 8%, according to the report.

“These returns have come with relatively limited volatility compared to other fixed income markets, despite such events as Hurricane Katrina and large insured loss years like 2011,” Aon Benfield reported. “Recent historical loss experience, in fact, has performed better than the modeled loss results even when factoring in large insured loss events. The expansion is impressive when considering that traditional reinsurers are also writing the risk at similar return expectations.”

A total of $8 billion in catastrophe bonds were issued in 2014, and as of Dec. 31, there were $24.3 billion in catastrophe bonds on-risk, Aon Benfield reported

 The outlook includes a list of seven transactions – with a total issuance of $2.3 billion – in the second half of 2014. The largest — issued by Kilimanjaro Re Ltd. on behalf of Everest Reinsurance Company — was for $500 million covering earthquake in Canada and the U.S. That issuance “successfully pushed the boundaries of the market,” Aon Benfield stated in the report, adding it was the largest cat bond transaction with a term of five years.

Another $500 million issuance was three classes of notes – issued by Tradewynd Re Ltd. on behalf of American International Group Inc. – covering “named storms in Canada and Mexico, as well as earthquakes in Mexico.”

In its outlook, Aon Benfield also discussed catastrophe losses in 2014.

“Insured global catastrophe losses in 2014 were at their lowest levels since 2009,” according to the report. “For the second consecutive year, the severe thunderstorm peril (tornado, hail, straight- line winds) was the costliest for the global insurance industry. While the majority of the losses are driven by events in the United States, other parts of the world are also noting significant levels of claims payouts from the peril.”

Global insured losses for convective thunderstorm events have averaged more than US$10 billion – adjusted for inflation to 2014 dollars – per year since 1990, Aon Benfield reports. The annual increase was 6.0% over the last 24 years.

“While much of the media attention is often focused on tornadoes, industry officials are quick to confirm that the majority of the losses resulting from thunderstorm claims are due to hail,” Aon Benfield noted.

“Assessors often report that hail stones ranging from pea-sized to as large as softball- sized can many times lead to a total loss that is costly for the insurer. Punctured roofs in homes, shattered windows and dented vehicles are the most commonly reported as hail falling from thunderstorm clouds can sometimes travel to the surface at speeds of up to 100 mph (160 kph). Damage reports often highlight that uncovered car rental facilities are the most vulnerable during hail events.”

2014 was the second consecutive year in which French and German insurers “paid out a  multi-billion bill” for hail, Aon Benfield added, referring to a June hail event that caused about US$3 billion in payouts in France, Germany and Belgium.