As the use of ILS capacity has grown within the overall insurance and reinsurance market, the industry has voiced concerns about how investors will react after a significant loss event, but industry leaders actually predict more ILS capital to enter than exit post-event.
During the 2015 ILS Bermuda Convergence conference, a panel on ‘converging capital structures’ shared opinions on the permanence, stability and willingness of insurance-linked securities (ILS) investors to participate in the global insurance and reinsurance market after a significant loss.
“There are a million different opinions on this, the answer is nobody knows,” said Greg Hagood, Co-Founder of Nephila Capital, the world’s largest investment manager specialising in catastrophe risk, weather risk and ILS.
“My personal view is that I’m pretty confident that some of our investors would leave, I’m pretty confident that more would increase, and I’m very confident that there’s a lot of capital on the side-lines that will come in to us, or to others in this room and across the globe,” continued Hagood.
He’s referring to the volumes of capital interested in catastrophe bonds, sidecars, and other alternative risk transfer funds, structures, or ventures, from investors that are currently sat on the side-lines, waiting for market conditions to improve before seeking to enter the sector.
Ali Al-Ali, Director and Co-Head of Insurance Structured Finance at Goldman Sachs, agreed, at least from an investor perspective, that in a post-loss scenario “you are going to see some investors pull-back from the sector, but you’re going to see some additional guys come in.”
Typically, in any financial market when a large loss event happens some market players’ may leave. This has been true of the reinsurance industry in the past, so it’s not too surprising to hear industry experts and leaders predict a similar outcome from the current institutional investor focused ILS space.
However, it’s interesting that Nephila Capital’s Hagood feels that personally, owing to the expansive trend of ILS and the volumes of capital still waiting to come into the market and access the risk, that the amount of capacity from alternative, or third-party sources could actual grow following a loss.
Hagood stressed that in Nephila’s view all insurers should have at least some of their coverage with a firm like them, “and that’s for all these people in alternative capital if you want to use that term.”
Adding that even if some players were to disappear post-event due to major losses, the growth and utilisation of ILS is such a “huge trend that is here to stay, and there will be a portion of that capital that reloads into the alternative bracket.”
Meaning that insurers should have confidence that the capital base will be adequate, and will likely be bigger post-event than it is today, explained Hagood.
The majority of the institutional investors deploying capital in the global natural catastrophe/property catastrophe re/insurance market come in the form of large pension funds, and hedge funds.
Typically they only allocate a very small portion, maybe one or two percent of their investments to the asset class, suggesting that in the case of a large loss event from say a natural catastrophe, their exposure relative to their overall investment portfolio will likely be minimal.
Furthermore, Al-Ali notes, “there is a lot of smart money from the institutional side backing these vehicles,” a notion that supports the apparent growing sophistication, and understanding of ILS investors regarding their investments and exposures in the sector.
Al-Ali expands on this point; “This is not about trying to make opportunistic returns to invest for one or two years, this is more, I should invest in this for five or ten years, I know on average, depending on what happens, I’m going to get potentially a loss one or two times, but I know that in the long run I will earn my respective return, and that’s the investor thesis.”
So the message from Hagood and Al-Ali is a clear one, while they, like everybody else in the space can’t be sure exactly what will happen to current ILS investors in a post-loss scenario, the sophistication, maturity, and ever-growing capital base and willingness of the entire ILS landscape should provide a comfort to insurers that while some will no doubt leave, more capacity is destined to enter after any significant loss event.
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