The participation of the capital markets and institutional investors in the insurance and reinsurance markets continued to grow in 2015, with insurance-linked investor inflows exceeding outflows, taking dedicated ILS capital to $70 billion, according to Willis.
It’s the first time that Willis, the global insurance and reinsurance broking firm, has cited dedicated ILS investor capital as having reached the $70 billion point.
After the mid-year June and July reinsurance renewals, Willis estimated that capital from alternative and ILS markets had reached $65 billion. So over the second half of 2015 the total dedicated ILS capital at work in the re/insurance market had grown by approximately 8%, to hit $70 billion according to the broker.
In the latest Willis Re renewals report, it’s clear that the broker believes that ongoing ILS market growth is at a rational pace, as evidenced by its discussion of ILS investor discipline being shown in key property catastrophe reinsurance markets in the U.S. at the recent January renewals.
Reinsurance broking competitor Aon Benfield also recorded alternative capital and ILS capacity growth, saying that it outstripped growth of traditional reinsurance capital and putting the amount of dedicated ILS and alternative capital at $69 billion at the end of Q3 2015. That suggests that Aon Benfield’s number will be higher than $70 billion by year-end.
Here at Artemis we have ILS investment fund managers listed who between them manage in excess of $61 billion. Add to that the capital in reinsurance sidecars, other reinsurer managed vehicles, from direct investors such as large pension funds, and it’s easy to see that $70 billion may actually be a low estimate for total ILS and alternative capital at work in the insurance and reinsurance market today.
In the aggregate investor inflows into ILS are exceeding outflows still, Willis Capital Markets & Advisory (WCMA) explains in its section of the Willis Re report. There has been a trend through 2015 for some ILS investors to cycle out of the market, but for new ones to move in to replace them.
With returns available from ILS, catastrophe bonds and other insurance-linked investments much lower than they were five years or more ago, some investors that have been in the sector for a long time have cycled out, or reduced their allocations.
For many this is a case of reassessing their allocations to the sector, or perhaps looking for new opportunities to access the returns of insurance and reinsurance risk. For some it could be a permanent exit, as the ILS asset class may no longer meet the return requirements they had set themselves and enjoyed for some years.
But education about the ILS asset class continues to spread and for large institutional investors, such as pension funds, sovereign wealth funds, endowments and family offices, the benefits of the asset class remain clear, making the available returns still attractive.
For many investors the available ILS returns are still particularly attractive, given the benefits of diversification, low correlation, relatively stable returns over a longer horizon and considering the challenging investment environment globally.
Willis Capital Markets & Advisory (WCMA) also noted that collateralised reinsurance sidecars and ILS funds are becoming increasingly important for reinsurers. This likely works both ways, as ILS structures increase in importance as providers of retrocessional capacity, but also as a source of efficient capital to augment a reinsurers own underwriting capacity.
Encouragingly, perhaps providing further evidence of the discipline of the ILS market and that ILS players will not push pricing down below their own return hurdles, WCMA said that; “Required natural catastrophe risk spreads remain stable for most risk-return combinations.”
In fact, WCMA reports that the minimum required returns actually increased in the quarter, which is something Artemis recorded from the catastrophe bond market where the average coupon return on cat bonds issued in Q4 2015 was higher than in previous quarters of the year (read more on this in our latest cat bond market report).
And the ILS market continues to look to expand further, with growth beyond the $70 billion looking assured over the course of 2016. Interest remains high in further integrating ILS capital and capacity into reinsurance programs, catastrophe bond sponsors remain keen to expand the coverage they receive and ILS fund managers continue to find new ways to access risk and to disrupt the re/insurance value chain.
WCMA notes that third-party reinsurance capital providers continue to evaluate ways to enter or expand into the primary insurance markets, where the disruption of ILS could perhaps be most felt in years to come.
Finally, WCMA also expects that insurers and reinsurers will continue to enhance their value proposition to customers by integrating third-party capital within their business models.
The broker cites the example of Markel acquiring reinsurance-linked investment manager CATCo, which it cites as “trailblazing”, adding that; “Third party capital managers can enhance a carrier’s ability to better service the reinsurance needs of clients while providing an attractive stream of non-regulated fee-based income.”
With the traditional insurance and reinsurance market likely to increasingly leverage ILS capital for risk transfer, reinsurance and retrocession, and at the same time embed third-party capital management within its business processes, further growth of dedicated ILS capital seems assured.
How rapidly it can grow depends on many factors, but growth seems certain and the investors behind ILS and third-party reinsurance capital will definitely find a wealth of new opportunities to deploy capital into re/insurance in the years to come.
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