ILS: a contender to traditional reinsurance

Capital market solutions such as catastrophe bonds and collateralised quota-share reinsurance vehicles represent an increasingly viable alternative to the use of traditional reinsurance, according to a report by rating agency Fitch.

Fitch believes that the growth and acceptance of alternative solutions to traditional reinsurance will have both positive and negative implications for reinsurers.

On the one hand, it provides reinsurers with a way to manage their exposure and capital, as well as serving as a source of fee income. On the other hand, capital market solutions provide competition for traditional reinsurers.

This, as well as the generally strong capitalisation of the market, has worked to notably dampen reinsurance pricing momentum in 2012.

If hardening insurance market conditions diminish going into 2013, Fitch expects less overall utilisation of capital market reinsurance alternatives than in 2011 and 2012.