A.M. Best's Global Reinsurance Segment Outlook Remains Negative

The insurance-linked securities (ILS) market potentially could bear up to 20 percent of the insured losses generated by Hurricanes Harvey, Irma, and Maria (HIM), according to a new Best's Market Segment Report, titled Global Reinsurance: Optimism Fizzles, It's Back to the "New Normal."

These three significant hurricanes during a 2-month period in 2017 now serve as a major test for how the ILS market will react following a series of catastrophic events. In terms of insured losses, economic losses, and number of deaths, HIM represented the top three global catastrophe loss events in 2017, according to A.M. Best. Losses from these events will be covered by primary insurers, traditional reinsurers, and various sectors of the ILS market.

A.M. Best believes that based on current loss estimates, the ILS segment potentially could bear between $14 billion and $18 billion of the insured HIM losses. Based on ILS market-estimated capacity of approximately $89 billion as of year-end 2017, this implies a reduction in capacity of between 15 percent and 20 percent. However, the decrease in capacity already has been replenished as more ILS funds have increased their assets under management and continue to participate in all facets of the ILS market.

"Losses associated with HIM will continue to develop, and the ultimate loss likely will not be realized for 2 to 3 years," said Asha Attoh-Okine, associate director. "Therefore the ILS market's portion of that total loss also will not be known for some time. The ILS market has provided an answer to how it will react after a catastrophic event. The reaction of the market has been to provide additional capacity, thus moderating prices, which generally rise after a force majeure event in the property-casualty insurance sector."

This continued inflow of additional capacity has challenged the ability of traditional reinsurers to secure rate increases, which has typically occurred in the past following significant hurricane events or seasons. A.M. Best anticipates that the bulk of the HIM losses for the ILS market will be borne by the collateralized reinsurance market, which has been the fastest ILS growth sector of the past few years. This growth has partially been driven by the desire of ILS funds to provide tailored coverage to ceding companies that take on risks not covered by other ILS instruments.

In addition to analyzing the state of the ILS market following the 2017 catastrophes, A.M. Best's report on the global reinsurance sector also includes a top 50 ranking of the world's largest reinsurers and in-depth reviews of the Lloyd's and life reinsurance markets, as well as geographic regions such as Asia Pacific and Africa.

A complimentary copy of this briefing is available on the A.M. Best website with site login registration.

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