As alternative capital grows, limited impact seen to reinsurance price & terms: Moody’s

As alternative capital in the reinsurance industry is expected to continue to grow, despite this Moody’s Ratings is not expecting any significant impact to pricing or policy terms for the rest of 2024 and in 2025, believing discipline will remain key for the ILS market.

As insurance-linked securities (ILS) markets continue to attract investor interest, Moody’s says that the pressure from weight of capital may not become an issue until beyond 2025.

“While alternative capital increases global reinsurance capacity, we foresee limited negative impact on reinsurance pricing or policy terms for the rest of 2024 and in 2025.

“That said, continued growth in alternative capital combined with increased traditional reinsurance capacity and low natural catastrophe losses could weigh on reinsurance prices beyond 2025,” explained Pei-Shuang Jen, Sr Ratings Associate at Moody’s Ratings.

The company added, “Reinsurers have adapted to the rise of alternative capital, often collaborating with this market, but it could become a more competitive threat as sophisticated risk modeling expand significantly beyond the market for Florida hurricane risk.”

The ratings agency sees catastrophe bonds as the key growth driver of ILS capacity, but believes collateralized reinsurance remains relatively “stagnated” although recognising aligned areas of the market, such as quota shares and sidecars are expanding.

They believe the cat bond market will keep growing in outright size through 2025.

But given the cat bond markets focus on higher-layers of reinsurance says, “There has therefore been little competitive impact on pricing across the broader market.”

Adding, “With reinsurers remaining disciplined on underwriting, we do not expect this to change over the next 12 to 18 months.”

The rating agency also says that improvements to modelling could encourage more capital down into more competitive areas of reinsurance, raising pressures, but notes that this will take time.

On returns, the expectation is that they will remain sufficiently attractive to continues bringing more capital to the catastrophe bond market.

Moody’s said, “Although cat bond and ILS returns have declined slightly in 2024 because of softer pricing, they remain strong relative to recent years. Moreover, while there have been several significant natural catastrophes globally in the first eight months of the year, the anticipated impact on the cat bond market is minimal as the perils and geographies involved are not covered. We therefore expect the cat bond market to remain attractive, and to drive further growth in alternative capital into 2025.”

While collateralized reinsurance is garnering more attentions, they do not expect this to result in sufficient inflows to derail the trajectory of the market at this time.

Saying they do not expect to “see material flows in the near term.”

But, Moody’s Ratings does believe that, “Over the long term, advancements in ILS data quality and risk modeling could pave the way for the deployment of alternative reinsurance capital into new business lines, such as mid-sized and small weather events, a high share of which are currently retained by primary insurers.”