While the generally accepted view is that insurance-linked securities (ILS) capacity and alternative capital are largely restricted to the well-modelled U.S. and other peak peril zones, evidence from the January renewals shows that the ILS market is expanding its reach.
True enough, the U.S. market remains the dominant territory for ILS capital and the well-modelled perils of U.S. hurricane and earthquake risks continue to dominate the market, as evidenced by our breakdown of outstanding catastrophe bonds by risk or peril covered, which shows U.S. catastrophe perils making up over 50% of the market.
But the market is becoming increasingly sophisticated and ILS or alternative capital is penetrating other regions, moving into specialty lines of business, gaining market share in new risks or perils, as well as moving to cover other lines up or down the reinsurance tower.
Some commentary from the renewals shows the increasing scope and reach of the ILS market. Some of the largest ILS fund managers are increasingly writing collateralised reinsurance contracts, enabling them to participate in quota shares, excess of loss contracts and pick up additional risk through growing participation across a variety of markets.
The growth of collateralised reinsurance underwriting among ILS funds and managers is one way new risks are being acquired and ILS capital is as a result increasingly seeping into Asia, Latin America and other markets as a result.
Deepening of relationships is another, as the largest ILS fund managers become staple participants of the world’s major reinsurance programs, ensuring them growing exposure and share as their capital allows.
At the same time the reinsurance sidecar is seeing somewhat of a resurgence, growing its share of the market by the end of 2015, with sidecar capacity at the highest level now for some years, perhaps ever (Guy Carpenter estimated $9 billion of sidecar capacity at the end of 2015).
As these, largely quota share, collateralised and capital markets backed reinsurance sidecar vehicles become increasingly recognised as an efficient way to quickly deploy new capacity, or to bring the capital markets within a traditional companies capital structure, the range of risks and perils covered by direct capital markets sourced capacity and ILS investors is increasing.
You only have to look at the results of mutual fund managers Stone Ridge Asset Management and Pioneer Investments to see the range of claims their ILS funds are now paying, with impacts from events across the globe and the specialty re/insurance lines due to their sidecar exposures.
With all the brokers agreeing that ILS or alternative sourced capacity in reinsurance continued to grow through 2015, albeit at a slower rate than in previous years, actually resulting in ILS gaining share from traditional players, expansion is one area that will help to fuel that growth on an ongoing basis.
Meanwhile, reinsurance broker Willis Re in its renewals report, discusses some of the specific regions and lines that have been seeing growing ILS and alternative capital participation.
In Australian, Willis Re explained that there was “Plentiful ILS capacity available,” at the January reinsurance renewals, “However this capacity is very selective given the generally soft market conditions,” the broker explained.
Meanwhile in the Canadian market, “Alternative capital continues to offer buyers access to competitive reinsurance capacity,” Willis Re reported.
In Central & Eastern Europe ILS capacity is beginning to make its presence felt. Willis Re said; “ILS markets displayed an increased appetite to participate on medium-sized and larger CEE programs.”
Across the whole of Europe, Willis Re noted a trend towards greater involvement of ILS capacity. “ILS markets have succeeded in deploying more capital, predominately in lower layers rather than more remote higher layers,” the broker commented.
Specifically on France, the impact of ILS is more muted, with “Capacity still high; ILS markets entered into the market to a limited extent,” Willis Re stated.
But in Germany conditions were more conducive to increasing participation from ILS fund managers, Willis Re explained, saying that it saw; “ILS markets showing greater presence and appetite, deploying an increasing amount of capital primarily through fronting arrangements.”
So there is plenty of evidence to suggest that the ILS market is extending its reach, largely through collateralised reinsurance vehicles such as sidecars and collateralised or fronted participation on reinsurance program renewals.
At the same time the catastrophe bond market also extends its reach gradually, bringing new sponsors, perils and structuring features to the market. While the growth of ILS capital has slowed, although it did still grow in 2015, the platform being laid is one for much more stable, long-term growth as opportunities allow.
As the opportunity set expands, the capital flowing into ILS will find it can be deployed more easily. And should there be any hardening in rates, the capital inflow could turn into a flood very rapidly.
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