Alternative capital raises accelerate to ~$11bn YTD, says Berenberg

Having only a few weeks ago estimated that as much as $8 billion of alternative reinsurance and insurance-linked securities (ILS) capital had been raised year-to-date, analysts from investment bank Berenberg have now upped that amount to ~$11 billion.

As a result, the analysts now believe that alternative and ILS capital flows into the insurance and reinsurance market are around $15 billion since hurricane Ian struck last year.

However, despite some early signs that the reinsurance capital supply crunch is easing a bit, the analysts do not believe that alternative capital raises and ILS market inflows are “sufficient to derail the strong rate momentum,” as yet.

When we reported on the analysts earlier figure, of the roughly $8 billion of flows Berenberg said had occurred, we estimated that around half would have been flows to the catastrophe bond market this year.

The new figure from Berenberg, based on their conversations with market participants on both the traditional and alternative reinsurance capital sides, suggests a ramp up in capital flows for other private ILS and alternative structures, likely for the mid-year renewals.

However, even with these flows, we don’t hear of any concerns related to overcapitalisation at this time, suggesting the analysts are right that any capital raised is just filling gaps in capacity.

In addition, maturities in the catastrophe bond market have been high, while on the private ILS side of collateralized reinsurance and retrocession strategies, participants are still replacing and recycling trapped capital in some cases, so the actual amounts deployable are not expected to be increasing meaningfully as yet.

“The new capital is merely alleviating some of the high pressure of increased demand for reinsurance,” Berenberg’s analysts stated.

Adding that, “The risk to pricing will be higher if we have a super “clean” nat-cat year.”

Because capital is not reaching levels where over-supply becomes a concern, the analysts believe that reinsurance pricing can remain higher for longer and are bullish about hard market prospects persisting into 2024..

Continued demand growth is expected to be a key factor here, as too is the fact some underwriting companies are shying away from natural catastrophe perils and climate risk, leaving more capacity gaps to fill.

“In our view, unless a significant amount of capital enters the sector, not only will the protection gap keep growing, but pent-up demand from existing business due to inflation and growing exposures will also be hard to be met. This suggests pricing both primary and reinsurance will need to stay higher for longer for capital to be enticed back,” the analysts state.

Also read: Analysts say ~$8bn of alternative capital raised YTD in 2023. Cat bonds could be $4bn+.