The seventh in our series of articles involving leading figures from insurance-linked securities (ILS) and reinsurance on the market as it moves into 2015 features Paul Schultz, Chief Executive Officer of Aon Benfield Securities.
We asked for participants thoughts and predictions about the ILS market, catastrophe bonds, collateralized reinsurance and reinsurance or catastrophe risks as an asset class as we move into 2015.
Paul Schultz leads the Aon Benfield Securities unit, that focuses on re/insurance capital markets, insurance-linked securities (ILS), investment banking and M&A, at insurance and reinsurance broking group Aon.
Paul provided his thoughts on a few specific topics as to what 2015 holds for the cat bond, ILS and reinsurance markets.
His response follows in full below:
Increased penetration of ILS and 3rd-party capital:
As the penetration of alternative capital increases, we expect to see reinsurers growing the amount of third party funds under their management. We also expect to see additional rated ILS reinsurers established.
With the use of alternative capital increasingly more mainstream, the ILS market will continue to evolve into a core component of many cedants’ risk transfer programs.
The type of risks covered by the ILS market will also expand with some funds already establishing dedicated specialty line investment strategies. In terms of products, we expect to see an increase in the utilization of contingent capital solutions.
What investors can expect to see in 2015:
We expect catastrophe bond issuance in 2015 to be in the range of $7 to 8 billion. A significant component (as much as 50%) of new issuance is expected to come from renewal of maturing transactions.
We also expect a number of new sponsors to enter the market largely due to the increased efficiency and ease of execution offered by platforms such as Aon CATStream.
We will see the continued expansion of longer-term deals, which was witnessed in its early stages during 2014. We will likely also see new risks introduced (e.g. regions, perils) as new sponsors look to secure multiyear/ diversified coverage.
The life/health space, which has been relatively benign in terms of new issuance, is expected to gain momentum in 2015. In addition, with the tightening of spreads, several corporate sponsors may find 2015 the right time to utilize the ILS market.
Prospects for M&A (in reinsurance or ILS):
In 2015, Aon Benfield Securities expects to see further M&A activity in the reinsurance sector as an abundance of capital continues to apply pressure to rates and insurers business models. Below average catastrophe claims over the last few years have left the industry with higher than expected profits and accumulated capital while a low interest investment environment continues to attract alternative capital to the sector.
Product innovation remains a key component to surviving through a soft market but there are certain reinsurers who lack the diversity, scale and therefore resilience to see themselves through the current market conditions and will therefore likely become M&A targets over the coming 12 months.
Returns on equity have come under increasing pressure particularly for those who are more narrowly focused. In addition, we also expect to see consolidation among certain smaller players as they look to obtain greater scale, access new lines of business, and possibly enter higher growth territories.
Our thanks to Paul Schultz for his time.
Like to be featured in an interview on Artemis or have some thoughts on the market for 2015? Contact us to discuss.
Artemis’ Q4 2014 Catastrophe Bond & ILS Market Report – A busy finish to a record year for ILS
We’ve now published our Q4 2014 catastrophe bond & ILS market report.
This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the fourth-quarter of 2014, looking at the new risk capital issued and the composition of the cat bond & ILS transactions completed during Q4 2014. It also includes a brief review of the full-year 2014’s record issuance.
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