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Third-party capital in the reinsurance market reached record highs in 2024, as broker Guy Carpenter, alongside rating agency AM Best estimated that it reached a substantial $107 billion at year-end, however, a key driver of the increase is the continued growth of the insurance-linked securities (ILS) market, which is the major component of third-party capital across reinsurance.

AM Best recently hosted a webinar which featured notable figures across the reinsurance industry, who discussed their reactions to the 1/1 renewals, as well as what they expect to see happen across the sector in 2025.

During the webinar, Carlos Wong-Fupuy, senior director, AM Best, highlighted third-party capital’s record performance in 2024, and then focused attention towards the role that ILS plays towards reshaping reinsurance capacity and pricing dynamics.

“I think that if ten years ago we were talking about ILS being a significant competitor to traditional capital, these days they are more in a converging role and working together,” said Wong-Fupuy.

He continued: “We see a lot of this increase on ILS capacity is actually from affiliated ILS funds, and a number of large-rated balance sheets actually have a ILS platform, which means that companies are working in such a way that they’re offering is sometimes actually contingent to having ILS capacity where they can reallocate risks depending on infrastructure appetite.”

Moreover, a recent report from AM Best highlighted how underlying ILS capital expanded throughout 2024 due to a large quantity of investors reinvesting their earnings across the market, which ultimately further expanded deployable ILS capacity.

In addition, Wong-Fupuy also commented on what role the hardening property reinsurance market plays towards shaping investor confidence going into 2025.

“I think that with the investors, especially on the ILS side, we have seen this reinvestment of returns. So, let’s remember, this is a segment that in the last few years is producing double digit returns, as close or in excess of 20%. Even with all the issues that we have been discussing, we are projecting something around probably around 15% or 17%, for the next couple of years,” he said.

“I mentioned earlier the risk premium that investors are assigning to that, so they are not expecting this to last for too long. Having said that we have a much higher interest rate environment as well.”

Wong-Fupuy also emphasized the need for a balanced approach to deploying capital and managing investor expectations.

“So, on the one hand, I think that the high returns that the segment is showing are achievable, but we have a cause of opportunity, which means that from an investor’s point of view, there are probably other lower risk alternatives which show the strong returns as well.”

ILS and reinsurance increasingly working together: Wong-Fupuy, AM Best was published by: www.Artemis.bm
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