Aon Benfield predicts $100bn to enter reinsurance sector by 2018

Looking ahead to the post-convergence space, Aon Benfield’s latest report on the reinsurance industry outlines a number of significant changes expected to unfold over the next five years. These changes, according to the report, entitled ‘Post-Convergence: The Next USD100 Billion,’ will be spurred on by the influx of alternative capital in the form of such investment vehicles as insurance linked securities, most commonly cat or catastrophe bonds.

Aon Benfield predicts that the next five years will see $100 billion enter the reinsurance sector, with reinsurers adopting an innovative approach to facilitating the free flow of investment capital. The “transformative” nature of this alternative capital will boost the value proposition of reinsurance for companies looking to mitigate risk. Similarly, the new source of capital will precipitate broader applications of insurance linked securities, to risks aside from natural catastrophes.

Despite a slight dip in reinsurer capital since the first quarter of 2013, the figure still exceeds capital totals registered for the end of 2012, says Aon Benfield. Relatively modest catastrophe losses in subsequent quarters in 2013 was not enough to boost overall numbers, as investment conditions and the rise of additional markets for cedents has tempered results thus far.

The next five years is also expected to bring continued interest in insurance linked securities, which are gaining recognition among insurers as an attractive source of risk transference. Likewise, Aon Benfield suggests that sidecars will serve as a popular instrument through which reinsurance providers can lower their capital costs.

The report also delves into the much-publicized rise of the insurance linked securities (ILS) market. Sponsors were drawn to the market by declining spreads, which arose out of significant investment capital that came from a variety of sources. By June 30 of this year, according to Aon Benfield, the total value of bonds on risk reached $17.5 billion, a record high. The figure also represents a jump of more than 2.6 billion over the previous year. The report suggests that growth of the insurance linked securities market is expected to continue apace, even in light of a significant number of bonds reaching maturity in the coming years.

With growing demand for reinsurance expected to continue, and in the absence of any major catastrophes that would result in significant loss, Aon Benfield projects that insurers will encounter favourable conditions come renewal time in January. Strong earnings by insurers should compel reinsurers to offer more customized products and to price them attractively.

Posted: Monday, September 30th, 2013