ILS fund managers see varied reinsurance renewal conditions

by Artemis on December 31, 2015

A number of the world’s leading ILS fund managers have said that they saw a wide variation in reinsurance renewal conditions for January 2016, ranging from disciplined in the United States, to somewhat “crazy” in Europe.

According to ILS Advisers, the ILS advisory and management firm behind the Eurekahedge ILS Advisers Index, and the ILS Diversified Ltd. fund-of-funds strategy which invests in an actively selected range of insurance and reinsurance linked investments funds, ILS fund managers have been seeing some signs of stability.

However, this stability in reinsurance pricing for the ILS fund managers collateralised participation in renewals, is seen the most in the United States, the region where catastrophe reinsurance programs have seen the steepest levels of decline in recent years.

ILS Advisors held a number of face to face interviews with some of the ILS fund managers it deals with, asking them about their experiences in the run up to the key January 2016 renewal. The interviews were conducted during the early negotiation phase of the renewals, so do note that the final pricing outcomes can differ by 1st January but these should be indicative of pricing direction.

For the U.S. market, still ground-zero for the property catastrophe and specialty reinsurance space where ILS fund managers are providing a growing amount of the market capacity, stabilisation is expected, with rates down only in mid or perhaps upper single figures.

Meanwhile the UK’s reinsurance market is seen as very competitive, with greater declines in pricing expected of 10% or even higher on some programs, according to the ILS fund managers interviewed.

The European reinsurance renewal market is where things get particularly heated for 2016, according to the interview respondents, with the steepest declines expected on some large reinsurance programs in the region.

In fact ILS managers said that “fierce competition” was to be expected on European risks, with one saying the market in Europe seemed somewhat “crazy”. This aligns with our experience from conversations with market sources in recent days, as we wrote recently here. ILS managers wouldn’t put a figure on the declines expected, but it seems safe to expect greater than 10%.

Meanwhile the diversifier markets, such as Asia, Australia and South America, continue to be inundated with capital and interest, which is suppressing rates in these regions. Some ILS managers said they have given up on chasing business in these regions, in the main, as even as a diversifier it no longer meets their risk adjusted return requirements.

One trend that ILS managers have witnessed in the run-up to the January 2016 reinsurance renewal is a continuation of the trend for more favourable terms and conditions to be offered to cedents in order to maintain the level of rates and pricing.

As we’ve written many times, this trend suggests both traditional reinsurers and ILS markets are taking on increasing levels of risk, if they are writing business with expanded terms just to secure a margin.

Finally, more ILS fund managers look set to include some level of specialty insurance risks into their portfolios in 2016, as a way to generate additional returns. With property catastrophe reinsurance pricing very low, specialty risks are a way to add both a diversifier and a return boost to a portfolio, if an ILS fund manager mandate allows it.

Read all our reinsurance renewals news and analysis here.

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