ILS funds to be increasingly influential in reinsurance: A.M. Best

ILS fund managers will experience ongoing growth and become increasingly influential in the global reinsurance market, rating agency A.M. Best expects, with more collateralised reinsurance placements for non-peak risks likely to be ceded to the capital markets and ongoing growth elsewhere in ILS.

Despite a slowdown in catastrophe bond issuance during the first-half of 2016 and reports that the inflow of alternative capital has slowed in more recent times in response to the softening reinsurance market cycle, the insurance-linked securities (ILS) space continues to broaden its reach, and influence in the risk transfer world.

Catastrophe bonds and collateralised reinsurance placements are the two largest sub-sectors of the global ILS market, but along with sidecars, retrocession and other risk transfer tools, third-party capital continues to gain traction and broaden its geographical and peril reach.

“Alternative capital will continue to flow to the reinsurance sector for the foreseeable future. ILS fund managers will be major players in the reinsurance sector as more collateralised reinsurance programs covering nonpeak exposures are ceded to the capital market; catastrophe bond risk capital continues to grow; and the potential for longevity risk transfer becomes part of the ILS transaction mix,” said A.M. Best, in a recent report on the global re/insurance market and its search for relevance, released in time for the 2016 Monte Carlo Rendez-vous.

As shown by the Artemis ILS Managers & Funds Directory, a total of 44 insurance linked investment managers have combined assets under management (AuM) of $66 billion, as at September 7^th 2016. Underlining the recent growth of the ILS sector, this figure stood at roughly $51.2 billion in September 2014.

ILS fund managers’ range in size and strategy, with some more focused on collateralised reinsurance and others more dominant in the catastrophe bond space, for example. Nephila Capital is currently the largest ILS fund manager in the space, with AuM of $9.3 billion, as at 1^st January 2016.

On the other end of the spectrum are newer funds such as Lombard Odier Investment Managers, which established an ILS and catastrophe bond investment team in August 2015, and has a current AuM of roughly $25.4 million.

Capital markets investors continue to show willingness for assuming insurance and reinsurance-linked catastrophe exposures and, with firms like Nephila actively seeking to get closer to the original source of risk, it’s clear that both ILS funds and investors are becoming more comfortable and understanding of the industry.

Furthermore, as investors and fund managers have grown in sophistication and maturity, helped by a constant desire to know more about the underlying risks and market discipline, the insurance and reinsurance space will likely become more accepting of the asset class, something that has helped the space reach the heights it is at today.

For the most part ILS capacity remains focused on easier to enter, better understood exposures, like the property catastrophe sector. But as ILS players look to get closer to the original source of risk and also desire better returns in less competitive business lines, it’s expected that it will find its way into new areas of the reinsurance industry.

The longevity reinsurance or longevity risk transfer market has great potential to expand and flourish, and as highlighted by A.M. Best this is somewhere that capital markets capacity could play a role.

What’s more, and something we’ve highlighted previously at Artemis, as reinsurers look for better yields outside of the property catastrophe arena and in less pressured classes of business such as casualty and specialty, it’s likely that at some point ILS will follow suit in some for or another, especially as reinsurers are seen to be utilising a greater volume of third-party capital alongside their balance sheets to optimise their business mix.

In the last two years the group of ILS fund managers have increased their combined AuM by roughly $15 billion and, during the same time the wealth of alternative reinsurance capital has continued to claim a larger share of the overall reinsurance industry.

Numerous factors, such as a large loss event, a prolonged softening reinsurance market, a continuation of the dangerously low interest rate environment, can and most likely will influence the growth and reach of the ILS market in the coming months and years.

But one thing seems fairly certain, that the broad range of ILS fund managers and the expanding base of capital markets investors are sophisticated, disciplined, and eager to access diversifying, uncorrelated insurance and reinsurance-linked business, a trend that shows no sign of letting up anytime soon.

Read all of Artemis’ Monte Carlo Rendez-vous coverage here.