Demand for ILS to continue as true convergence edges closer

by Artemis on November 28, 2016

The sophisticated insurance-linked securities (ILS) investor base continues to fuel demand for insurance and reinsurance-linked exposures, and the persistent flow of third-party capital is bringing the traditional and alternative space closer together, according to ILS and reinsurance industry leaders.

Addressing an audience at the 2016 meeting of the reinsurance industry in Bermuda, a panel sponsored by ratings agency Standard & Poor’s (S&P) and PwC Bermuda highlighted the continued growth of the ILS space.

At a reported $75.1 billion in size the alternative market continues to increase its share of the overall reinsurance market pie, and the convergence of the traditional and alternative reinsurance markets look to be edging ever closer, explained the panel.

Conference speakers noted that eventually traditional players will act as conduits to the growing pool of capital markets investors that utilise the ILS space for uncorrelated, diversified and stable returns, a trend that has intensified in the low interest rate environment.

Rick Pagnani, Chief Executive Officer (CEO) of Mt. Logan Re, Everest Re’s collateralized reinsurance sidecar vehicle, said; “There is demand, and you’re going to see that continue. And we will come up with markets to satisfy demand.”

To date, the majority of ILS capital has focused on property catastrophe lines, a trend that has been aided by ease of entry when compared to other areas, better modelling capabilities and increased understanding of the underlying exposures, but the sector does appear willing to expand its remit and influence other markets.

Despite Pagnani stressing that the investor base is “very sophisticated,” Dirk Lohman, Chairman and Managing Partner at Secquaero Advisors, underlined the need for greater awareness and education when thinking about the expansion of ILS capital.

“This is going to require education of the investors as to what they’re buying. When you get to other areas of risk, it’s even more opaque,” said Lohman.

Continuing to underline the important and positive impact securitisation can have on an insurers performance; Lohman highlighted the “potential for securitisation to optimise insurance companies’ capital structures.”

Panellists did note the impressive growth of the marketplace in recent times but also stressed that the alternative market is still in its infancy, and that securitisation is only just starting to influence the underlying industry.

The catastrophe bond market and the collateralised reinsurance sector make up the large majority of the ILS industry, and demand among capital markets investors is expected to persist and even intensify, as low interest rates have pushed investors to search for higher, more stable returns elsewhere, seemingly finding the ILS sector as a viable and sound investment.

However, Managing Partner at Hudson Structured Capital Management, Michael Millette, emphasised the need for the market to match the demand of its willing investor base, and develop the right solutions to help move the market forward.

“We got caught up trying to structure everything like a cat bond. Casualty risks don’t work that way – neither do life risks. We need to expand our toolbox a little bit. The cat bond is a nice invention, but it certainly can’t be the last one,” said Millette.

Artemis explained recently how alternative capital was evident in mid-market commercial risks, and with exposures such as cyber expanding and becoming better understood, ILS innovation could enable the sector to play an increasing role in other types of risks.

Investor appear more than willing to assume risks outside of the property cat space in return for higher yield and further diversification, but the maturity of the asset class suggests that a clear and solid understanding of the underlying exposure will be required.

Panellists explained that although some in the space might see alternative reinsurance capital as more nimble than traditional coverage, the latter would always have a place in the marketplace. And as the lines between traditional and alternative reinsurance capital and structures continue to blur and the utilisation of ILS increases, it could be ever more difficult to separate the two in the future.

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