As reinsurance demand rises $5bn+, alternative capacity fills renewal gaps

The alternative capital markets, so insurance-linked securities (ILS) funds, ILS investors and other third-party capital sources, have played an important role at a mid-year reinsurance renewal that saw demand increase in a capacity constrained marketplace.

Aon’s Reinsurance Solutions team explained that demand for reinsurance increased at the June and July renewal season.

The broker estimates that an additional $5 billion plus in reinsurance limit was sought by insurers at the June and July renewals.

This elevated demand was largely a reflection of higher inflation expectations, the broker noted, adding that “inflationary pressures, combined with the impact of financial markets volatility on investments and surplus, are likely to place property programs under increasing pressure in the second half of 2022.”

Traditional reinsurers entered the renewals with a reduced risk appetite, while some key markets even reduced their appetite for occurrence cat covers.

On the aggregate side, capacity has been constrained for a while now and that did not change at the recent renewal season.

Lower-layers also experienced dwindling demand, driving some carriers to increase their attachments and use alternative solutions, including captives, to fill their lower reinsurance tower needs.

Another alternative solution has been third-party capital, with some ILS funds able to fill gaps for cedents at the renewals, while some cedents also turned to source reinsurance through catastrophe bonds and other instruments.

“Insurers were able to achieve the limit needed through portfolio differentiation, more flexible terms and conditions, and through access to the full scope of the market, including alternative capital,” Aon’s Reinsurance Solutions said.

Alternative capacity sources were also instrumental in getting some lower-layers of reinsurance towers filled, it seems.

“Overall, reinsurers sought higher attachment points in programs, creating porosity in lower layers that required data-led client differentiation and the support of alternative markets to finalize coverage,” Aon said.

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