New reinsurance capital raised under $10bn will unlikely dent the recovery the re/insurance sector has seen in pricing and improvements in terms and conditions year to date, according to JP Morgan.
JP Morgan estimate that about $8bn of capital has been raised YTD. On a gross basis, we believe the figure is around $10bn from catastrophe bonds.
The total size of that space has increased $3.6bn, after taking into account redemptions, which we see as a fairer way of assessing flows into the asset class.
JP Morgan stated that it would be surprised if the industry ended up with a material surplus vs demand or, if surplus capital is generated, whether it would be deployed into the reinsurance space with discipline among market participants remaining strong.
In the traditional industry, less than $4bn has been raised, with the headline capital raise of $1.5bn from Everest Re did not truly increase industry capital but were used for acquisitions.
The performance of insurance linked securities (ILS) has been strong YTD. Which is a reflection of stronger pricing levels and a relatively benign catastrophe backdrop, especially for tail type events.
JP Morgan have estimated that total natural catastrophe insured losses so far are in the region of $6-8 bn. Looking at the last 10 years, the average industry loss for Q1 is around $13.5bn which, adjusting for inflation, is probably close to $15bn.
Issuance or capital inflows into the alternative capital space has become a key concern for the re/insurance industry, analysts have also observed.
Catastrophe bonds have performed well and are only really triggered by tail events. Collateralised reinsurance was more of a direct competitive threat to traditional reinsurance products.
A huge $7.1 bn of catastrophe bond and related insurance-linked securities (ILS) issuance featured in the second-quarter of 2023, taking first-half issuance to a record of more than $10.3 bn, according to Artemis.
The large majority of quarterly issuance were traditional 144a property catastrophe bonds, with just a few privately placed, or cat bond lite deals issued. As a result, Q2 2023 also set a record for property cat bond issuance which totalled $6.9 billion, with transactions covering a range of perils and regions.
AON data revealed that, while there has been growth in catastrophe bonds, the collateralised reinsurance space has not seen growth in recent years.
With higher returns being offered on catastrophe bonds, JP Morgan expects capital will make its way back into the alternative space via these types of instruments in the near term, rather than by collateralised reinsurance.
Losses stemming from Hurricane Ian, following several years of heightened catastrophe losses, have solidified the arrival of a hard market and dampened the influx of new capital from insurance-linked securities (ILS) investors, according to AM Best.
It notes that 2022 saw a mix of catastrophe events that varied by size, type and location. In addition to Hurricane Ian, major events included European windstorms, Australian floods, severe convective storms in France and Winter Storm Elliott.
At the same time, smaller catastrophe events have as much potential as large events to impact ILS transactions by eroding retentions on aggregate deals.
Some investors are holding steady in this asset class, but considering the heavy catastrophe losses of the last six years, sentiment among some ILS managers is that the supply of capital, particularly for aggregate reinsurance and retrocession, will remain tepid for some time despite high demand given the losses, along with inflation and lower asset valuations.
With more capital available, the market may see a shift in dynamics. Smaller players could face pressure to merge or innovate to stay competitive, while larger companies might leverage the additional capital to expand their market share.
The additional capital will increase the overall capacity of the market, enabling insurers to underwrite more significant risks and offer broader coverage options. This could attract new business and help in managing large-scale losses.
The increased capital may drive innovation in risk management and insurance products. Companies might invest in advanced technologies and data analytics to better assess and mitigate risks, enhancing their overall value proposition.
Regulators might need to adjust oversight mechanisms to ensure that the increased capital does not lead to excessive risk-taking. Ensuring financial stability and protecting policyholders will remain a priority.
Edited by 
Nataly Kramer
