Reduced ILS capital to support rate rises at upcoming renewals: Moody’s

Reinsurance and retrocession pricing is set to benefit from an expected continued reduction in available alternative or insurance-linked securities (ILS) capital, according to Moody’s Investors Service.

At the April 1st and June / July mid-year reinsurance renewals, Moody’s is not expecting a significant influx of new capital into the ILS sector, which aligns with the investor sentiment we are hearing at this time.

That is, aside from catastrophe bonds, which Moody’s notes “are one form of alternative capital that has continued to grow strongly.”

While there are still investors looking to enter the sector and some looking to upsize allocations at this time, the latter is not a widespread phenomenon right now across the investor community.

Sentiment has certainly been dented, with many investors in ILS seemingly on-hold for now, keen to see how the industry responds to the challenging catastrophe loss years it has faced and delivers on its promises.

ILS fund managers are also being particularly careful about matching capital to the opportunity this year. Meaning they are controlling inflows in some cases, to ensure they can deliver on returns for their existing investors.

There doesn’t appear to be any expectation of significant ILS market growth at this time, except for in the catastrophe bond segment which has continued to perform and is seeing robust issuance.

Which is likely to help in keeping rates moving in a positive direction at the upcoming reinsurance renewals, Moody’s believes.

“The total stock of alternative capital has been broadly flat over the past five years, reflecting losses and some institutional investors’ wavering commitment to the asset class.

“Additionally, a significant portion of collateralized reinsurance capacity is currently “trapped,” as losses from 2020 and 2021 develop,” the rating agency explained.

Adding, “Catastrophe bonds will continue to grow but we believe a lack of additional overall supply of alternative capital will support pricing gains at the upcoming April and midyear reinsurance renewals.”

Prices are expected to continue rising through 2022, but the pace is likely to slow, Moody’s believes.

With risks facing the traditional reinsurance market, Moody’s warns they need to protect their profits and so the industry should be more-aligned on seeking higher rates at renewals this year.

“While we expect price increases to support the sector in 2022, prolonged inflation and sustained financial market volatility pose a significant threat,” explained Moody’s VP and Senior Analyst Helena Kingsley-Tomkins. “Reinsurers’ earnings have weakened significantly over the last decade, despite the improvement in 2021.”

Price rises are supporting performance for the reinsurance sector and this year it appears the competition from alternative capital will be lessened by a continued reduction in stock and availability of ILS capital.

The catastrophe bond market could apply some pressure, on certain layers of risk where cat bond capacity is most targeted and effective.

But even here, the cat bond funds and investors are likely to hold their line on pricing as well, with this segment of the ILS market also particularly focused on supporting their returns at this time.

There is a lot of discipline evident, alongside dented investor appetite, which together should provide support for reinsurance and retro rates right through 2022 and perhaps even into the January 2023 renewals.

Another year of elevated catastrophe losses would almost guarantee more price rises in 2023, we believe, alongside which the geopolitical situation may both drive losses to the traditional market, as well as make their businesses more volatile, thus focusing minds on rates and returns once again.