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Eric Andersen, President of Aon plc, spoke at an event at the Monte Carlo Rendez-Vous hosted by Guernsey Finance yesterday and explained that the brokers’ repositioning in reinsurance and risk transfer, under Risk Capital, has enabled it to better respond to the global request for capital and deliver on risk transfer innovation.

Highlighting some of the innovative insurance related transactions where structures and teams in Guernsey have played a role for Aon, Andersen pointed to the International Federation of Red Cross and Red Crescent’s DREF deal, or a recent public-private arrangement to channel insurance risk capital to support Ukraine.

“I think these are such an innovative aspect of where we’re all trying to go to provide risk financing to new areas where there’s need, where government budgets are tight, but these organisations see more and more demand,” he explained.

Demand is rising for these kinds of solutions, Andersen said.

Adding, “We’re seeing some real uptick from other organisations who are looking to this type of room and rooms like it around the world to help them think through how to provide the right financial support for them.

“Our teams are really committed because it does help us make a difference. So the ability to use the skills that we have in our team based in Guernsey, the awareness of what the capabilities are and how we deploy them is really such a critical thing.”

He went on to explain how Aon has restructured its risk related businesses to try and meet some of these opportunities.

Andersen said, “Aon has been restructuring its risk business, and I think it’s restructuring it based on what we’re seeing from client need, and that client need fits right into the capabilities of what this room can offer.

“Ultimately, the global request for capital, no matter where it’s from, is a building demand, not just from insurers, but from our large corporate clients everywhere in the world.

“So our creation of something we call Risk Capital, where you’re really taking the reinsurance analytics and the reinsurance structuring capabilities around ILS, around parametrics, and we’re trying to find ways to source capital to get it to the clients where they need it the most around the world.”

He continued to explain, “Historically, we have done a very siloed approach around our ILS business, our reinsurance business, our insurance business, our captive business. But recognising that as the world has moved faster and the need for more innovative financial solutions has moved from reinsurers to insurers to corporates, that we needed to be more nimble.

“So the pulling together of those businesses under one roof, taking a whole client view of it, has allowed us to create more innovation and what I mean by that is more access to capital in its different forms.”

Closing his speech by saying, “Working with our team in Guernsey, structuring with our primary brokers, working with our ILS team, being able to provide not just traditional capital in the risk business, but also using that structure to be able to provide employee benefits in the event of an earthquake, which is something that was done in California, or working with island nations who are looking for pre-disaster risk financing that fits right into the wheelhouse of this group.

“So structurally, we have moved the firm to put ourselves in a position where we can actually leverage the skills that are in this room in a way that drives better outcomes, not just for our traditional insurance or reinsurance clients, or corporates, but governments and struggling areas where our capital hasn’t really gotten to in a way where we think we could make a big difference.”

Aon responding to global request for capital and risk transfer innovation: Andersen was published by: www.Artemis.bm
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Speedwell Climate, a leading provider of weather, catastrophe and climate data, indices and settlement services, has been acquired by Vaisala, a global company focused on provision of measurement instruments and intelligence for climate action.

Vaisala aims to expand its activities in helping organisations to mitigate weather-related financial risks with the acquisition, while also expanding its subscription-based business.

It also marks Vaisala’s entry into the insurance segment, with Speedwell’s suite of data services and tools already extensively used by insurance and reinsurance markets, as well as corporations, to protect themselves from financial losses caused by weather-related uncertainties.

Speedwell’s data and software is used to structure, price, and settle index-based climate risk transfer contracts.

The company was first prevalent in the weather derivatives marketplace and has over recent years been increasingly adopted by those trading in parametric insurance, reinsurance and risk transfer.

Speedwell already serves re/insurance market participants, investment funds, including in the insurance-linked securities (ILS) market, and corporations such as in renewable energy, and works with the CME Group.

Vaisala said the acquisition of Speedwell strengthens its position as a global leader in its field, aligning with its strategy to build recurring revenue in data, and to create opportunities to broaden offerings and scale growth within both existing and new customer segments.

“The combined skills and dataset of Speedwell Climate and Vaisala Xweather bring new opportunities to help customers mitigate and adapt to climate change. With weather becoming increasingly unpredictable, organizations need new tools to manage their risk position. We are very excited to welcome the skilled Speedwell Climate people to our team – together, we can turn weather anxiety into weather confidence,” explained Samuli Hänninen, Head of Vaisala Xweather.

The acquisition of Speedwell Climate Ltd and its group companies is subject to regulatory approval and likely to be closed in Q4 2024. Speedwell was formed in 1999 and was a very early player in the weather derivatives market, later moving into parametric insurance as that market expanded in the 2000’s.

Speedwell Climate, parametric & index data / settlement specialist, acquired by Vaisala was published by: www.Artemis.bm
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Client demand for risk capacity is “accelerating in all dimensions” according to Shiv Kumar, President of GC Securities, the capital markets and ILS specialist unit of reinsurance broker Guy Carpenter.

Speaking to Artemis around the 2024 Monte Carlo Rendez-Vous event, Kumar explained that the insurance-linked securities (ILS) investor-base has an opportunity to lean forward into these trends, to derive new opportunities.

“The ILS space has been very successful in addressing the need for property catastrophe risk capacity in the market over the past two decades. With increasing economic growth, inflation in property values and climate change, the demand from our clients for risk capacity is accelerating in all dimensions,” Kumar explained.

But added that, “We see some hesitation from investors in providing solutions for aggregate covers which include secondary perils and there is limited investor appetite for lower layers in the reinsurance tower,” while in addition “The market also struggles with E&S portfolios and program business.”

He also noted that, “The penetration of the ILS market beyond property catastrophe lines is being attempted but has been challenging.”

But urges the market to seize opportunities that are evident in clients needs, saying, “As more capital flows into the ILS space and the traditional reinsurance market remains robust, investors will have to lean forward in some of these areas to construct interesting and diversified portfolios. At GC Securities, we are committed to educating the market and broadening its footprint.”

Moving on to discuss challenges that ILS markets and investors might face, Kumar highlighted model-reliance and how certain views of risk can differ.

“The ILS market is very technical in that it is underpinned by third-party expert modelling,” he told us. “This is a desirable feature as it provides consistency and rigor to the market.

“However, the models are updated as new information becomes available but the updates are not implemented at the same time in the ILS and traditional market.

“This creates a potential situation where a tranche may look riskier under a new model version in the ILS space compared to what the sponsoring cedent or the traditional reinsurance market may see in a prior model version on their system.”

Kumar went on to caution that, “Investors should be careful to not price themselves out of business at year-end due to risk quantification variation in different model versions.”

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Even without any major catastrophe loss events over the rest of the year, Michael Stahel, Partner and Portfolio Manager at LGT ILS Partners Ltd., is not expecting a significant shift in premium from current price levels and notes the company will strategically shift capacity between areas of the market to source the best deal opportunities for its investors.

Speaking with Artemis at the 2024 Monte Carlo Reinsurance Rendez-Vous event, Stahel explained that LGT ILS Partners, the specialist dedicated ILS investment unit of the private bank and asset manager LGT Capital Partners, sees the end of year reinsurance renewal price discussion as likely to be nuanced, but also noted that it is important not to be complacent as loss events can occur at any time.

Discussing what drives the price conversation and what factors are front-of-mind at the RVS, Stahel said, “During this period of various conferences in Fall, one of the key questions from our investor base is usually where we see reinsurance pricing for the upcoming year, now that these conferences and meetings are taking place.

“We acknowledge, of course, that the ultimate price level for capacity depends on many factors.

“Each counterparty is distinctly different; underlying portfolios, strategies, market access and loss experiences vary significantly.

“These aspects, combined with important qualitative assessments, are ultimately driving the individual price for reinsurance for a primary insurance company.”

Continuing to explain, “The surprisingly quiet hurricane season currently implies that there should be sufficient capacity available for the renewal round 2025. However, such a discussion is clearly premature as market participants are very much aware that the hurricane season will continue for several weeks and is still able to generate significant activity.

“Living in Switzerland, I recall that back in 2012, I was mounting the winter tires on my car when hurricane Sandy made landfall in New York at the end of October!

“And whilst the level of inflation has seen a significant reduction in recent months, the adjustments in insured values typically lag considerably, and we still expect to see an adjustment for inflation playing a role in the regulatory risk assessment for 2025.”

Summing up that, “As such, even absent of any significant loss event until year-end, we do not expect any significant shift in premium from current price levels.”

Moving on to discuss the various areas where the LGT ILS Partners team source their investments for fund strategies, Stahel noted that not all are equal, in price terms.

“An interesting observation circles around the price difference between the cat bond market and the market for traditional reinsurance transactions. Especially in the first half of 2024, we have witnessed an influx of capital in the cat bond segment, leading to a lower premium compared to private transactions.

“At LGT ILS, we are indifferent around the transactions structure; we like clean and well-structured cat bonds, but with our in-house rated reinsurer Lumen Re, we can transact the same deal in reinsurance format.

“This allows us to strategically shift capacity between the markets, to accommodate the area where capacity is scarcer and placed at more attractive premium levels,” commented Stahel.

While the optionality of being able to access insurance risk in various forms and structures benefits the investor-base of the LGT ILS Partners funds, Stahel also highlighted that cedents can leverage this to their own advantage as well.

“Insurers and cat bond sponsors can apply a similar strategy,” Stahel told us.

“Issuing a cat bond is a longer-termed project, and a swift response to a potentially short-termed capital influx is difficult, if not impossible.

“It may however be advisable for insurers and cat bond sponsors to complete the work and internal approval process for a bond issuance and prepare the organisation to place a bond in the market, but with the clear strategy to only do so if the market is able to absorb the deal at favorable terms,” Stahel suggested.

No significant shift in premium from current price levels expected at renewals: Stahel, LGT was published by: www.Artemis.bm
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Dean Klisura, the President and CEO of Guy Carpenter has explained that the market is well capitalised and this is accelerating, while reinsurers remain open and motivated to do business.

Speaking during a briefing held in advance of the Monte Carlo reinsurance meetings, the reinsurance broking CEO noted the market still sits in a state of equilibrium.

Klisura explained, Number one is the market has ample capacity. Reinsurers are motivated to see our clients and do business in Monte Carlo and, so, people in the market have described it as equilibrium, with very engaged clients and reinsurers heading into this weekend.

“All of our clients will be entering these renewal discussions this weekend hoping to differentiate themselves from their key peers in the marketplace, and really leverage their key strategic trading relationships with reinsurers.”

On the client side he said that cedents are “focused on portfolio management and risk mitigation across their portfolios,” while on the capital provider side “reinsurance markets are really bringing a detailed and disciplined underwriting approach to each differentiated renewal at January 1.”

Despite certain published concerns around casualty lines, Klisura said, “Many of our reinsurers are open and motivated for business at 1.1, they want to grow their portfolios.”

He highlighted ongoing headwinds, of inflation, geopolitical risks and macroeconomic uncertainty, while catastrophe losses and climate change are also current concerns that will play into the upcoming reinsurance renewal discussions.

Then going on to say, “But there are also tailwinds that are benefiting our clients in the marketplace and our trading partners.

“The reinsurance market continues to be very, very strong and well capitalised. Capital in the marketplace is strong and accelerating, and for the first time in perhaps three years, we’re seeing the advent of new startups and new capital really being discussed to enter the marketplace in 2025.”

With reinsurers experiencing strong returns and insurance-linked securities (ILS) markets benefiting from this as well, Klisura does not anticipate discipline falling.

“Reinsurers want to hold their positions, want to be disciplined, and they want to write more business as we head into 2025. But we do expect continued and sustained underwriting rigor in the marketplace,” he explained.

But also hinted at the potentially tough negotiations we could see at the year-end renewals this year.

“As you heard from many CEOs this week, reinsurers want to hold their gains, really keep structures, attachment points, terms and conditions where they are, which are producing very, very healthy, ROIs for those businesses.

“So, it’ll be a challenging conference for our clients to try to make some headway in those discussions,” Klisura said.

Also read: New cat bond sponsor interest to continue in 2025, alternative capital to keep flowing: Rousseau, Guy Carpenter.

Reinsurers open and motivated. Capital strong and accelerating: Klisura, Guy Carpenter was published by: www.Artemis.bm
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Marcel Grandi, Head of ILS Sourcing at Zurich-headquartered insurance-linked securities (ILS), catastrophe bond and reinsurance investment manager Twelve Capital, believes the current reinsurance market environment and its pricing may persist longer this time.

In a recent interview, around the 2024 Monte Carlo Reinsurance Rendez-vous event, Marcel Grandi of Twelve Capital told Artemis that he has more confidence in the harder cycle being sustained.

Explaining some of the recent backdrop to the market environment, Grandi said, “ILS markets benefitted from a record high rate environment over the last two years for both collateralized re as well as cat bonds.

“The active wind season forecasts which motivated an increase in buying demand dampened pressure on rates during the year. In fact, cat bonds and in particular Insurance linked Warranties experienced a more dynamic upward price development in the first half of the year and in particular shortly ahead of the start of hurricane season also offering opportunistic opportunities.”

Grandi also discussed the loss environment, noting that after the reset in reinsurance pricing and terms that occurred through the last few years of renewals, the ILS sector has been better able to manage its exposure to frequency and severity.

Grandi said, “In the absence of large sized catastrophe events so far, the trend for elevated insured nat cat losses continued in the first half of 2024. Insured losses from severe thunderstorms in the US were again the main source contributing to over USD 40bn of the total insured losses of more than USD 60bn worldwide (the usually more loss intensive second half of the year yet outstanding).

“However, the impact to reinsurers was limited and the retro as well as ILS markets were not affected.”

Going on to say, “The structural enhancements achieved in the last years’ renewals as elevated general retentions, limitations of the scope of coverage, clear definitions of the covered natural perils, high event deductibles (in the case of aggregate structures) are helping the ILS markets to manage the apparent trend of an increased frequency and severity of secondary perils as thunderstorms, wildfires or floods.”

Grandi went on to highlight the issue of climate change, saying this will be one of the ongoing challenges for ILS managers.

He explained, “The management of the effects of climate change in ILS structures remains a core priority. Considering the loss trend in secondary perils which continued in 2024 the question of the insurability of certain secondary perils remains.

“This includes a closer look into the modelling quality for certain secondary perils as well as possible structural and contractual adjustments to mitigate unwanted secondary peril exposure.”

While that suggests continued work is needed to maintain the appropriate level of risk-sharing, between primary, reinsurance and retrocession sides of capital provision, Grandi believes gains made through adjustments tocontract terms can prove more sticky this time.

At Twelve Capital, the opinion is that these conditions for deploying capital to reinsurance opportunities can be sustained for longer.

“We are anticipating the stable and healthy reinsurance cycle to continue possibly for longer than previous cycles where peaks lasted for around two years before rate erosion started,” Grandi told us.

Explaining that, “With around USD 105bn to 110 bn of alternative capital outstanding the growth of alternative capacity has been limited recently with a healthy match of supply and demand.

“The outlook for ILS investors remains positive.”

Read all of our interviews with ILS market and reinsurance sector professionals here.

Stable, healthy reinsurance may persist longer than previous cycles: Twelve Capital’s Grandi was published by: www.Artemis.bm
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Global reinsurance company Hannover Re said today at the Monte Carlo Rendez-Vous event that innovation remains on the agenda even while demand for traditional reinsurance remains high, citing examples of parametric risk transfer and its recent cloud outage cyber catastrophe bond.

The global reinsurer is expecting continued and ongoing demand for high-quality reinsurance capital and protection over the rest of this year and into 2025.

There is a preference for the non-proportional areas of reinsurance and Hannover Re says that terms and conditions continue to be attractive, particularly in this area of the market.

While the company is also hoping for relative stability in the market, as it targets profitable growth, saying it believes price and terms have stabilised.

Anticipating a balance of supply and demand at the key January 2025 reinsurance renewals, Hannover Re says the market remains favourable, although again expresses its preference for non-proportional business given where primary rates sit.

“We want to grow with our clients and continue to offer them the best possible coverage and capacity. To do this, rate levels must remain adequate,” explained Jean-Jacques Henchoz, Chief Executive Officer of Hannover Re. “Insured losses are still trending higher. In view of the various challenges facing the industry, reliable reinsurance protection is indispensable. In line with our strategy, we remain well positioned for profitable growth and a preferred business partner with our clear focus on reinsurance, our excellent underwriting expertise and our very strong capital base.”

Identifying new opportunities to help clients with emerging risks is a focus for Hannover Re and the company cites some of its work in the cyber insurance-linked securities (ILS) market as one example.

Earlier this year, Hannover Re has sponsored a $13.75 million Cumulus Re (Series 2024-1) parametric cloud outage catastrophe bond that was privately issued and placed using the firm’s Kaith Re Ltd. vehicle, with modelling of the cyber risks undertaken by Parametrix.

On this deal the company said today, “Losses associated with cyber risks are increasing substantially owing to digital transformation and technological advances. To tap into additional non-traditional capital for cyber risks coverage, in April 2024 Hannover Re brought to the capital market the world’s first catastrophe bond to protect against risks resulting from cloud outages.”

Sven Althoff, member of Hannover Re’s Executive Board, explained why addressing such emerging exposures is important to Hannover Re.

“While there is still a need for action on cyber risks, climate change is and will remain one of the greatest challenges of our time. Recent floods and heatwaves have once again highlighted the continued dramatic proliferation of extreme weather events. This is a strain on the economy and is increasingly putting insurers to the test,” he said.

Althoff went on to highlight other areas of innovative protection that Hannover Re has a focus on include parametrics.

Saying, “At the same time, the protection gap is widening as losses rise, especially in emerging countries. This is where innovative concepts such as parametric covers can help to cover climate-related risks and offer more insurance protection.”

Looking at the renewal prospects for end of year, Hannover Re said that in Europe there is “no room for rate reductions” from the reinsurers’ perspective.

The company sees continued pressure for primary insurers in the US, with a range of factors that have been driving prices for reinsurance higher persisting.

In catastrophe reinsurance Hannover Re said that, in the US, “rising demand for reinsurance capacity” is expected, while “the market environment should again remain attractive in 2025.”

In Europe the company said, “In view of the severe floods in Germany in 2024, further efforts are needed to support catastrophe business on a sustainable basis.”

While on Japan nat cat, “The reinsurance market in Japan showed considerable discipline in the 1 April renewals, with market demand holding stable. The earthquake risk in the region was once again evident in 2024, even though no appreciable reinsured losses were incurred. Substantial flood and typhoon losses as well as hail events in the past two years similarly underscored the need to factor all climate-related perils into the pricing of Japanese catastrophe business.”

And in Australia and New Zealand, “After many years of major natural catastrophe events, the region has escaped unscathed this year. Multi-peril risks remain, however, and insured values are rising, driven in part by inflation. This will likely continue to fuel demand for catastrophe coverage, while Hannover Re will concentrate on offering such protection at commensurate prices and with adequate retentions.”

Finally, Hannover Re noted its record levels of activity in the catastrophe bond market.

As we reported in August, in 2024 Hannover Re has beaten its own full-year record for catastrophe bond limit fronted for already.

The company said today, “In the insurance-linked securities (ILS) market, Hannover Re was once again able to transfer several catastrophe bonds to the capital market for its customers. Following on from ten transactions in 2023 with a total volume of USD 2.8 billion, ten transactions have already been successfully completed in the first six months of 2024 with a total volume of USD 3.4 billion.

“Covers were placed against losses from natural catastrophes including floods, windstorms and earthquakes. It was also possible to structure a parametric cloud outage cover, under which this risk was transferred to the capital market for the first time in the form of a bond.”

Our figure was slightly lower, so we clearly either missed a deal or have not included it in the right year, perhaps attributing it to 2023.

But, either way, Hannover Re’s role in the ILS and cat bond market continues to expand.

Hannover Re cites cloud outage cat bond & parametrics as areas of innovation was published by: www.Artemis.bm
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In order to avoid disappointing investors and guarantee continued access to capital, the reinsurance and insurance-linked securities (ILS) industry needs to escape the market-cycle mindset and deal with the biggest threat it faces, which is inertia, according to Chris McKeown of Vantage Risk.

McKeown is the Chief Executive for Reinsurance, Partnership Capital, and Innovation at growth company Vantage Risk. He spoke with us around the 2024 Monte Carlo Rendez-Vous event, to share his views on current market conditions and the importance of staying disciplined in reinsurance.

His role encompasses Specialty and Property Reinsurance and the AdVantage offering, which is a collateralized re/insurer focused on partnership capital. So McKeown is well-placed to speak to the evolving industry dynamic as the year-end discussions begin.

With returns currently elevated for both reinsurers and ILS strategies, McKeown discussed why that is and his hope that the industry doesn’t become complacent, or let standards slip, to risk sliding back into old habits of allowing risk-adjusted returns in the market to decline too far.

McKeown told Artemis, “A good year doesn’t prove the thesis that we’re now in a sustainable marketplace and guarantee continued access to capital. Letting our long-term focus fall to the wayside will be our undoing.

“With economic inflation, social inflation across verdicts and settlements, putting more value in front of risks, climate… Now is not the time to fall into a habitual disposition.

“The market needs to maintain the level of risk-adjusted returns in order to grow. And we all should want the market to grow.”

Adding that, “There is still work to be done in many geographies, and for many perils, but the hard work achieved to recognise the trends in the major and secondary perils in the US will hopefully persist into 2025; pulling back to less than stellar terms now would be folly.

“For now, the industry has achieved a reasonable balance between supply and demand. However, this is a delicate balance, given evolving risks and structural constraints.”

Asked what he foresees as the biggest challenge for reinsurance and ILS markets, McKeown suggested it is falling back to old habits and failing to move forwards and innovate.

“Inertia is the biggest threat to our industry today, Steve. We need to escape the gravitational pull of the conventional, market-cycle mindset,” he explained.

“That said, we’re controlling the narrative better as a market.

“The property cat marketplace required a correction of radical measure in 2023 due to years of ignoring trends in inflation, demographics, values, and retrospective pricing.

“We have, as risk capital providers, successfully re-set the market to a more sustainably profitable level.”

He went on to highlight how this re-set in reinsurance pricing and terms has enabled the industry to achieve the stellar returns of the last year or more.

While, so far in 2024, largely stable pricing has been experienced by reinsurance and ILS capital providers and the catastrophe bond market has set new records.

But McKeown questions some of the reinsurance industry’s long-held beliefs, around the inevitability of the pendulum swinging back to a softening market environment.

“There’s an archaic belief that the large swings in market cycles are inevitable and we’re powerless to do anything,” he explained.

Continuing to say that, “If so, we are bound to under-impress investors and not achieve consistent access to capital.”

McKeown further said that, as an industry, “We must continuously challenge our ingrained thinking and prove that this is a viable market.

“The threat is that our hard-earned confidence from 2023 turns into hubris, or worse inaction, and we’re blinded to the apple cart tipping in slow motion.”

McKeown then discussed the need for more capital to support the industry and we asked him what could tip the cart?

He said, “I think it is akin to market psychology.

“Firstly, from a structural standpoint, we’d do well to continue to find ways of bringing more, and more efficient capital, into our industry to improve our relevance in a rapidly evolving risk landscape, whether due to changing exposures or climatology.

“That leads to my second point, let’s acknowledge that changing exposures are a bigger driver of loss today than climate, currently. As a society, we’re continuing to stack more value in the way of storms, earthquakes, and fires than ever before.”

Going on to explain, “The total value of the U.S. housing market doubled in the last decade and is now worth $52 trillion. We’re building new housing units in risky places, ~580,000 in Florida and ~370,000 in California from 2020 to 2023. All new builds in Florida are hurricane exposed and new builds in California are increasingly wildfire exposed. Once we control for increasing housing values, construction costs and population (which is a data issue – collecting better, more timely information), climate is the next biggest source of uncertainty for natural catastrophe losses. We know a warmer climate introduces volatility and the prospect of increased severity and frequency looms large.”

McKeown then acknowledged that inputs from outside the industry are also influencing the market, especially in terms of how capital flows occur, again reiterating that the market needs to deliver on capital provider expectations.

“We’re in a floating rate business. The industry lives and breathes the general economic cycle in returns on assets. And we’re also an essential good, so, historically anyway, largely recession and depression proof. No matter the economy, people and businesses need to mitigate risks,” he told us.

“It’s prudent for us to be aware of broad conditions but let’s focus on risk adjusted returns that keep the industry reasonably profitable. We must keep an eagle-eye on rate adequacy.

“That said, being on our toes keeps us agile and driven to forge a healthy, resilient market. Constraints are often the genesis for creativity.”

Concluding this part of our interview by saying, “Collectively, we must continue innovating to attract sufficient capital and meet tomorrow’s risks.”

Read all of our interviews with ILS market and reinsurance sector professionals here.

Inertia the biggest threat. We must escape the market-cycle mindset: McKeown, Vantage was published by: www.Artemis.bm
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The outstanding market for collateralized reinsurance sidecar structures has reached a new record high of $10 billion in 2024, which represents roughly 40% growth on the prior year, Aon Securities estimates.

Aon Securities, the insurance-linked securities (ILS) and investment banking arm of the global insurance and reinsurance broker, notes that the new issue reinsurance sidecar market has continued its “re-emergence” with investors looking to support property portfolios, as well as newer structures backing casualty risks.

These quota share structures are seen as an aligned way to support a reinsurer, sharing in its underwriting profits and losses, without any of the exposure to business and corporate risk that might come with an equity or private equity investment.

Hence, in a lot of cases, the backers of sidecars are private equity like investors, although institutional allocators such as pensions, endowments and family offices are equally as prevalent in the sidecar market, especially in fund structures that allocate to multiple private sidecar quota share arrangements.

Previously, Aon had noted that it estimated over $1 billion of new capital has entered this proportional collateralized reinsurance sidecar market in the last year.

Now, the Aon Securities unit has provided a clearer view of the size of the sidecar marketplace, putting it at around the $10 billion level, in terms of sidecar capital outstanding, a new record high as of the middle of 2024.

It represents growth in sidecar risk capital of around 40% over the last year, which outpaces the catastrophe bond market.

Reinsurance sidecars had reached $8.4 billion in capital outstanding right back in 2015, which was the previous high for this part of the collateralized and ILS market.

But sidecar investors were badly affected by the catastrophe losses experienced through 2017 to 2019 and the looser terms around sidecar structures meant the trapping of collateral was also particularly impactful to them.

Sidecars tended to come with buffer loss table clauses that favoured the sponsors and made it very easy for capital and collateral to get trapped, even where losses were deemed relatively unlikely.

The terms and conditions around collateralized reinsurance sidecars were updated in the years following, but it has taken time for investors to get comfortable with the new terms, and now we are beginning to see the effects of this hard work from structuring and legal teams.

Aon Securities also notes that, “Growth of the sidecar market was facilitated by the return of past ILS investors who waited out the soft market cycle and new investors attracted by heightened returns.”

The company further explained, “Higher potential returns in property sidecars have been driven by historically elevated premium rates, more remote attachment levels for underlying treaties, and narrowed coverage definitions.

“Importantly, the property sidecar cycle is being driven not only by reinsurance portfolios but also insurance portfolios. Insurers are looking to sidecars as a source of proportional reinsurance to address the increased earnings volatility from higher excess of loss retentions.”

That is an important distinction.

Many of the reinsurance sidecar investments that resulted in challenging loss and trapped capital situations were retrocessional quota share structures.

The reinsurance quota shares, for primary insurers, tend to have been structured in a way that is more aligned between the protection buyer and capital provider, which is understandable given these are often seen as growth capital by their sponsors, rather than a risk transfer vehicle.

Aon Securities also highlighted the growth of casualty sidecar transactions, saying, “Casualty sidecars have also developed as the combination of improved casualty insurance pricing, higher interest rates, and substantial risk spreads for private credit instruments make these structures possible.

“Investors are seeking structures which provide long-dated investment float to manage within their asset management platforms. This dynamic has allowed (re)insurers to negotiate attractive cession terms to supplement their traditional coverage.”

It’s worth noting that other data sources are not quite as bullish on the size of the sidecar market. While recognising growth and a resurgence, the latest data from AM Best and Guy Carpenter put the reinsurance sidecar market at between $6 billion and $8 billion, although recognising it could be nearer the upper-end of that range.

Find details of numerous reinsurance sidecar investments and transactions in our directory of collateralized reinsurance sidecars transactions.

Reinsurance sidecar market estimated at record $10bn in 2024: Aon Securities was published by: www.Artemis.bm
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According to reinsurance broker Guy Carpenter’s Global Specialties division, there is an expectation more non-marine retrocessional capital and capacity comes to market through the end of year, which could impact supply-demand dynamics and cost of coverage.

Commenting on property retrocession market conditions today around the Monte Carlo RVS, Guy Carpenter said that Q2 2024 saw “a significant increase in demand for peak peril retrocession (retro) coverage and cat on direct and facultative (D&F) limit.”

While, “Demand for retro XoL coverage increased following the April 1 renewals, driven by appetite from buyers at January 1 for peak peril retro top- up limit and new buyers looking to re-enter the market.”

The market remains narrow for lower-level retro coverage, “but brokers are keen to get more reinsurers back into that space,” Guy Carpenter’s team said.

Commenting on the quota share market, GC said results have been strong.

“Results in quota share have been strong, so more markets are willing to deploy capacity on a quota share basis. However, in the retro space, there is still more demand than supply for quota share capacity,” the reinsurance broker explained.

The rest of the hurricane season will influence the end of year renewals, but already there is an expectation of more capital being available to support retrocession deals at the January 2025 renewals.

“There is currently sufficient capital in the market to meet demand, but more is likely to be deployed, which will impact overall cost and supply dynamics,” Guy Carpenter said.

Adding, “Attachment points are expected to be as prominent in renewal discussions as price.”

“Clients buying a material amount of capacity should be assessing as many pools of capital as they can – traditional reinsurers, ILS reinsurers for occurrence and aggregate, as well as quota share and cat bonds or looking at index products,” explained John Fletcher, CEO, Bermuda.

“As with previous renewals, Guy Carpenter advocates accessing multiple pools of risk capital. As we approach the renewals, we anticipate that clients will have a greater choice of who they want to trade with,” added Richard Morgan, Head of Non-Marine Specialties.

More retro capital expected, will impact cost & supply-demand dynamic: GC was published by: www.Artemis.bm
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