Alternative Reinsurance Capital To Grow Influence In Europe: Berenberg

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Includes: GLRE, HVRRF, HVRRY, SSREF, SSREY, TPRE
by: Steve Evans

Analysts at Berenberg have discussed the growing presence of alternative reinsurance capital in European markets, noting a rise in non-insurance entities transferring risk via the capital markets. A trend that could pose a threat to some reinsurers, says Berenberg.

With the exception of Eastern Europe the rest of the region continues to experience the softening of reinsurance rates, exacerbated by the growing influence of alternative capital across Europe, notes Berenberg.

"The alternative market is increasing its presence in the region and previous top layer "rules-of-thumb" are reported to have been broken at 1/1," said Berenberg, adding that while the inflow of third-party investor-backed capacity continues to grow, some rate stabilization has been evident in recent issuances.

The catastrophe bond market, which makes up a significant portion of the overall insurance-linked securities (ILS) sector's capitalization, saw a rise in the volume of parametric trigger structures utilized by corporate sponsors, "looking to transfer risk directly into the capital markets, potentially allowing these to substitute some of their traditional re/insurance coverage for catastrophe bonds," says Berenberg.

Adding that this trend "is a less positive development for the reinsurance industry."

Artemis discussed recently how market participants had observed, and predicted further growth in the number of government and corporate ILS sponsors, following deals such as PennUnion Re Ltd. (Series 2015-1) from Amtrak in the final quarter of last year.

Features like the parametric trigger and the expanding capital-base of the ILS market offers primary insurers, and increasingly non-insurance organizations an efficient alternative to more traditional reinsurance programs, and the recent evolution of the asset class has seen its benefits more broadly used across the global risk transfer landscape.

"The reinsurance industry faces structural challenges. Most notably, the provision of capital and the underwriting of risk (and some associated services) are being disaggregated by those new entrants offering alternative risk transfer mechanisms (ARTMs)," said Berenberg.

"While we recognize the threat posed by ARTMs to the industry, we do not expect these to have a significant impact on the reinsurers in our coverage beyond exacerbating cyclical pricing pressure," added the firm.

For the big four European domiciled reinsurers, being SCOR, Hannover Re (OTCPK:HVRRY), Swiss Re (OTCPK:SSREY), and Munich Re, Berenberg feels the impact of alternative reinsurance capital will likely be less than the smaller players.

Interestingly, the firm predicts that owing to this primary insurers in the region will reduce allocations to medium and smaller tiered reinsurers, a trend that "is likely to force down pricing as mid- and lower-tier players fight to remain relevant by offering lower rates, but since the primaries need the support of the top tier reinsurers, these should suffer relatively modest price declines."

The reach of alternative reinsurance capital continues to broaden but until it meaningfully finds its way into new risks and regions it will continue to exacerbate the softening landscape.

Just how much ILS increases its share of the overall reinsurance market pie in 2016 remains to be seen, as does the impact it has on rate movements for reinsurers of all tiers and sizes.

Should the expected rise in corporate and government sponsors come to fruition in the coming months, and expand outside the U.S., it will be interesting to see how reinsurance companies adapt to the growing presence and market share of the ILS asset class across Europe and the rest of the risk transfer world.

At the moment the price of reinsurance in Europe is limiting ILS's role in the region, but despite this ILS fund managers are taking shares in many of the regions programs, securing a footprint which can be expanded as and when rates look more attractive.

Looking at the diversification within a major ILS fund managers portfolios, these days, it is clear that ILS capital is expanding its influence into new regions gradually. That bodes well for future opportunities for investors to deploy more capital, as market conditions allow.

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