Reinsurers seek returns where ILS isn’t playing, but it can soon follow

by Artemis on August 26, 2016

In an effort to offset some of the negativity in the soft global reinsurance marketplace, companies are increasingly looking to enter new and diversifying business lines where the wealth of third-party capital is yet to have a meaningful impact, according to A.M. Best.

The abundance of capital in the reinsurance market continues to contribute to the supply/demand imbalance and competitive landscape, as traditional and alternative capital providers fight for a seemingly shrinking market share.

For the most part, and owing to its ease of entry when compared to other business lines, insurance-linked securities (ILS) capacity and features has a strong focus on the property catastrophe space, resulting in steep rate declines at renewals and limited profitability.

But increasingly ILS is expanding into specialty lines of reinsurance, directly into primary commercial property business, looking at corporate risk transfer and generally reaching out more deeply into the insurance markets of the world.

In a recent publication from international ratings agency A.M. Best, Best’s Review, reinsurance industry leaders discussed the state of the reinsurance industry and how the ILS space is impacting the sector, ultimately creating both challenges and opportunities for firms.

“While the alternative capital market
 has presented a competitive threat for reinsurers, it also has opened up new opportunities. Reinsurers have been
 moving into insurance-linked securities,” said A.M. Best.

As the wealth of third-party capital continues to expand and cement its place in the global re/insurance market, participants have increasingly sought to work with it rather than against it, understanding that it’s likely a permanent feature of the space that can offer value.

However, owing to its focus on property catastrophe lines reinsurers have also been increasingly looking at other business lines, such as crop, flood and mortgage, in order to achieve better returns away from the glut of alternative capital.

While new and emerging business lines such as cyber, mortgage, accident and health, flood, and crop insurance do provide reinsurers with a new revenue stream, part of the attraction comes down to the fact that “they aren’t places that third-party capital generally will go a this point,” said Greg Reisner, Assistant Vice President at A.M. Best.

“So that makes them quite attractive to reinsurers,” continued Reisner.

It’s an interesting point, and while ILS capital may be a minimal force, if one at all, in some of the reinsurance coverage areas mentioned above, third-party capital structures and ILS funds are following and increasingly being used in some of these lines.

An example of this can be seen with Bellemeade Re Ltd. (Series 2015-1) and Bellemeade Re II Ltd. (Series 2016-1), a series of catastrophe bonds from United Guaranty that protects against mortgage insurance risks, as recorded by the Artemis Deal Directory.

Furthermore, certain catastrophe bonds have included flood protection, and ILS capacity is also increasingly looking to access crop risks (with them increasingly featuring in both ILS funds and reinsurance sidecar portfolios), so the move away from property catastrophe risks isn’t just a trait reinsurers are adopting in testing times.

The fact is that like insurers and reinsurers ILS players are also looking for increased returns, diversification and also attempting to get closer to the original source of the risk in order to improve efficiency.

Areas like crop are a prime example of a specialty reinsurance class that many ILS markets understand and are happy to underwrite, particularly the weather exposed areas of this business.

However, much of the alternative capital being funneled into lines of business such as those mentioned above is coming from reinsurers own ILS funds and sidecars, so in some cases they may accelerate competition themselves.

Features of the ILS space like catastrophe bonds and the continued growth of the collateralized reinsurance and retrocession marketplace, supports the expansion of ILS into new business lines and regions, so reinsurers that do enter new regions and risks might find that it doesn’t take too long before competition and capacity increases there also.

In the challenging environment reinsurers will continue to look to innovate and enter business lines where competition is minimal and rates are higher, but it would be naïve to assume that the wealth of mature, and sophisticated ILS capacity wouldn’t attempt to do the same.

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