ILS & reinsurance equilibrium means innovation required: Frank Majors, Nephila Capital

To some extent, an equilibrium has been reached between alternative and traditional reinsurance capital, and further innovation is required if the insurance-linked securities (ILS) space is to continue growing, according to Frank Majors, co-founder and principal of the world’s largest ILS fund manager, Nephila Capital.

The alternative, or non-traditional reinsurance sector continues to expand in terms of size, claiming an increasingly larger slice of the overall reinsurance market pie, despite a notable slowdown in the entry of ILS capital in more recent times.

Established around two decades ago to cover the most remote, and peak exposures, the market has had a beneficial impact on the reinsurance and broader risk transfer sector, helping regions manage their peak risks that had been challenging to diversify, such as California and Florida, for example.

In an interview with ratings agency A.M. Best, Majors discussed if an equilibrium between alternative and traditional reinsurance had been reached.

“You could make an argument that we have, as it relates to what I would call the original problem. When we think about why alternative capital made sense 20 years ago when we started Nephila, it was about peak risk,” said Majors.

With regards to helping with that problem, Majors told A.M. Best that to a certain extent, an equilibrium is close. However, for the ILS space to continue down its impressive growth path, underlined by the rapid expansion of the collateralised reinsurance sub-sector and the unprecedented volume of catastrophe bond issuance witnessed in the first-half of this year, further innovation is required outside of the property catastrophe space.

“For there to be additional growth in the industry, we’re probably going to have to see some additional innovation, whether it’s different product lines, different forms of delivery, or efficiency.

“Allocating more into peak risk without innovation is probably not the answer. Finding different ways to innovate so that capital can be used efficiently is probably the way forward,” said Majors.

The ILS space does appear willing and able to expand its remit outside of the property catastrophe space, a segment of the global reinsurance industry that has experienced some of the steepest rate declines throughout the softening cycle, driven in part by the heavy focus on this area by ILS capital.

Nephila Capital has itself excelled in finding new ways to source the catastrophe and weather risk that its investment strategies offer to investors, especially in the pipelines for accessing risk and connecting it to capital that it has developed in recent years.

But other ILS investment managers are looking further afield, to more niche risks and classes of insurance or reinsurance business they feel can become an investment opportunity.

Artemis discussed earlier this year that an innovative, novel casualty ILS transaction had been completed, which, alongside flood, growing interest in cyber and terrorism exposures, has been an area that some in the sector anticipate the ILS space expanding into in a more meaningful way.