In this month’s ILS blog, Gary Martucci, director and Maren Josefs, associate director at rating agency Standard & Poor's, discuss the impact of adapting to the influx of alternative capital by providing innovative solutions and lower prices to reinsurance purchasers.
The boundaries between alternative and traditional capital keep blurring. The reinsurance sector is adapting to this influx of alternative capital more by providing innovative solutions and lower prices to reinsurance purchasers. Currently there is about $24 billion in catastrophe (cat) bonds outstanding. So far this year more than $5 billion of cat bonds has been issued, of which Standard & Poor's Ratings Services (S&P) has rated $1.3 billion.
Thus far in 2015, the issue amount of publicly placed cat bonds has not been as strong as last year, and there has been an increase in the use of private cat bonds (cat bond lite) and collateralised reinsurance. In total, Aon Securities estimates alternative capital invested in the reinsurance market at $66 billion as of June 30, 2015, up from $59 billion (12 percent) as of June 2014. Although the progression may not be linear, during the next few years, we believe the cat bond market will continue to grow – by 10 percent to 20 percent per year – as investors accept new risk models assessing perils across the globe (on at least a parametric basis). For us, there's no reason to think this market is going away anytime soon.
ILS, S&P, Reinsurance