At the annual meeting of the reinsurance industry in Monte Carlo, Thomas Blunck, a member of the Munich Re board of management, said that he expects the insurance-linked securities (ILS) space to continue on its current development path.
Addressing an audience at the 2016 meeting of the reinsurance industry in Monte Carlo, Blunck shared his views on the growth of the ILS space and where he thinks the market might go in the coming months and years, and whether innovation could spark a change in the sector.
“I would not expect a leapfrog in innovation in the ILS market in the next few years, but rather a continuous further development,” said Blunck, continuing to add that in recent times the ILS sector has witnessed a move from parametric to UNL covers, and a shift from catastrophe bonds to collateralised reinsurance placements.
“Also based on the fact that for example, pension funds are becoming more acquainted with the risk, building their own expertise,” continued Blunck.
As highlighted by the Artemis Deal Directory, catastrophe bond issuance has declined in recent quarters and although the market is still attractive to investors and sponsors alike, collateralised reinsurance has become the fastest growing segment of the ILS space.
Blunck explained that this is in part due to the fact that collateralised placements are less complex than catastrophe bonds, making them easier to transact and also that they are not so exposed to capital market rules.
Highlighted by Blunck, and a fact about the ILS space that is repeated by many industry observers, analysts and experts, is the fact it’s still largely focused on the property catastrophe space, owing to ease of entry and the short-tail nature of the risk. And Blunck doesn’t expect this to change anytime soon, stating that Munich Re is in a “very intensive dialogue with pension funds, and we can’t sense moving them into other lines of business.”
“So I wouldn’t expect the nature of ILS innovation that turns the market into a different direction,” added Blunck.
It’s an interesting point, as part of the reason rates are consistently falling in the property catastrophe space is down to the highly competitiveness of the space, as the wealth of third-party capital mainly plays here.
While returns in the ILS and reinsurance space might be reduced when compared with previous years, for pension funds they are relatively attractive, so it might not be necessary for them to look to other lines of business outside of the property catastrophe space.
That being said, and as we’ve discussed previously at Artemis, ILS capital could participate in other business lines, and could follow reinsurance capital into areas that are less pressured.
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