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Collateralized Reinsurance Surpasses Cat Bonds to Emerge as Dominant Source of Alternative Capital

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Published on : Mar 07, 2017

ALBANY, NY, March 07, 2017: The 47-page publication is titled “The Emergence of Alternative Capital in Reinsurance” and evaluates the rising importance of this new reinsurance strategy. The market dynamics have been discussed at length and a comparative analysis of traditional capital and reinsurance markets as against these alternative methods has been provided. 

It has been observed that an increasing number of conventional reinsurers are turning to alternative capital strategies and including them into their own business models. Reinsurers have begun playing a major role in the management of new capital on behalf of investors and also ensuring proper transactions in the alternative capital market. At the same time, a number of reinsurers are joining forces with independent fund managers to put into action various transactions with the help of alternative tools such as sidecars, collateralized reinsurance, catastrophe bonds, and industry-loss warranties.

The report states that alternative instruments such as these have played a big part in making reinsurance a key investment strategy by offering features such as low volatility, low correlation, and diversification. This has encouraged a rising number of investors to put their money on alternative instruments. These instruments also possess the ability to neutralize the various shortcomings of conventional investments. All of these benefits set alternative instruments apart from other classes of assets.

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Another trend that the report focuses on is the growing pull of collateralized reinsurance over catastrophe bonds or cat bonds. The former overtook the latter as the primary source of capital in 2013, speaking in terms of offering overall capacity to the alternative capital market. With the increasing capacity of collateralized reinsurance, the market for the same is likely to continue to grow at a tremendous pace, as compared to catastrophe bonds. In 2015, collateralized reinsurance accounted for a massive share of nearly 57.0% in the overall capacity of the alternative capital market. 

The publication also talks about alternative instruments’ rising importance and recognition as an asset class compared to other traditional asset classes. The major point the report zeroes in on is that alternative instruments are comparatively less volatile owing to the fact that in this case, the risk of insurance does not depend on the performance of the capital market. Another point the report discusses is the transformation of the overall reinsurance industry on account of the massive flow of capital and the rising focus on innovation in the field of insurance-linked securities (ISL).

This report is designed to help clients understand as well as recognize the importance of ISL and comprehend how alternative capital has gradually made a name for itself as a disruptive force in the global reinsurance sector. 

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