Modest rate increases after a year of heavy catastrophe losses suggest that the peaks and troughs of the reinsurance cycle are getting smoother.

That is the view of Fitch Ratings, whose analysts believe that alternative capital is changing the dynamics of the market.

In a special report on reinsurance, entitled “Significant catastrophe losses; modest rate rises”, Fitch said even after the increases seen during January renewals, property catastrophe reinsurance rates were still 30 per cent below 2013 levels.

The report finds that the rapid growth of insurance-linked securities, such as catastrophe bonds, has had a significant impact.

“Fitch believes the continued growth of the alternative capital sector has altered reinsurance market competitive dynamics and, as a result, capacity shortages are less likely and the underwriting cycle may be flatter in the future,” the report states.

“According to Aon, alternative capital capacity has increased from $10 billion in 2005 to almost $90 billion in 2017. Also, investors in ILS have largely replenished the majority of the capital that was lost as a result of the 2017 catastrophe activity.”

Fitch said reinsurers were making greater use of capital markets as part of their retrocession arrangements to reduce balance-sheet volatility, resulting in less damage to reinsurance capacity that might have been expected in similar big-loss years in the past.

“ILS investors have replenished capital through new collateralised vehicles, post-event funds and new catastrophe bond issuances, which meant that a significant portion of lost capital was replenished in time for the January renewals,” Fitch said.

The rating agency said insured losses had a relatively limited impact on most reinsurers’ capital as they were well spread between insurers, reinsurers and capital markets.

“We did not downgrade any reinsurers as a result,” Fitch said. “However, we moved XL and Axis to a negative outlook, reflecting a decline in capital adequacy, near-term sensitivity to adverse adjustments to loss estimates or additional loss events, and adverse underlying earnings trends.”

Insured catastrophe losses totalled around $130 billion last year. Rate rises in US loss-affected areas were between 10 per cent and 20 per cent, Fitch said. But this was partially offset by the flat European market, which was coming off a benign catastrophe year.