Alternative capital not expected to dampen Jan 1 rate increases: Fitch

Third-party, or alternative capital is unlikely to have a meaningful influence on potential reinsurance rate increases at the key January 1st, 2021 renewals season, according to Brian Schneider, Senior Director, Global Head of Reinsurance, Fitch Ratings.

Speaking during the rating agency’s recently held webinar, which examined global reinsurers at the mid-year with a view to the renewals, Schneider suggested that it was going to be challenging for alternative capital come January.

“I don’t expect it to be a strong influence, we’ve seen the amount of alternative capital out there decline in recent periods and I think that will continue into January,” said Schneider.

According to insurance and reinsurance broker Aon, alternative reinsurance capital declined by 4% in the first-quarter of 2020 after returning to growth in the final quarter of last year.

“We are hearing about new funds coming up with additional capital that could come into play, as well as some additional traditional capital as well. But, I think what we’re seeing is that collateralised re has been having difficulties as investors get a little bit more scrutiny on whether they want to have another year of trapped capital,” continued Schneider.

Industry analysis suggests some $15 billion of trapped capital, and Schneider feels that this has likely caused some concern for investors in the insurance-linked securities (ILS) space as losses continued to mount, sometimes from unexpected areas.

“So, from a collateralised re standpoint, I think that’s going to be down,” he said.

Schneider was more positive on the near-term outlook for the catastrophe bond marketplace, which has rebounded in recent months after a lull during the height of the COVID-19 outbreak.

“There’s really a different dynamic involved with cat bonds, where they’re more specific on what their losses are going to be, and you’re not really going to see COVID-19 hit the cat bonds much.

“So, I think reinsurers should feel pretty good about the potential for rate increases coming through in January, and I don’t think the alternative capital is going to dampen that much. Maybe in the future at some point, but I think at this point, right now, it’s going to be challenging for the alternative capital come January,” said Schneider.