Primary insurer integration of ILS capital to persist in 2018: GC Securities

Large primary insurance companies are expected to continue integrating insurance-linked securities (ILS) capacity into their risk transfer programs in 2018, as senior management increasingly appreciates the benefits of having access to third-party capital, according to reinsurance broker Guy Carpenter’s Cory Anger and Chi Hum.

Following the devastating impacts of catastrophe events in 2017, Artemis discussed the state of the ILS marketplace with Cory Anger, Managing Director, Global Head of ILS Origination and Structuring at GC Securities, and Chi Hum, Managing Director of GC Securities, which is the capital markets and ILS arm of Guy Carpenter.

2017 was a very interesting year for the ILS sector, as unprecedented levels of catastrophe bond issuance and continued growth of collateralized reinsurance covers coincided with an extremely active loss year in terms of catastrophe events, in what’s been described as the market’s first real test.

But despite the impacts of third and fourth-quarter catastrophe events, traditional insurers and reinsurers, and ILS investors remain attracted to the space, while the market’s response highlights the sophistication and maturity of both the investor and sponsor base.

“We expect big primary insurers to maintain and/or continue integrating Insurance-Linked Security (ILS) capacity into their risk transfer programs in 2018. The payment performance of such deals following the Q3 and Q4 2017 cat events, combined with the renewal pricing of ILS transactions to-date, has demonstrated the stability and reliability of ILS investors.

“However, the larger question is whether the big primary insurers will continue to increase their net retentions in response to the 2017 cat events, which can limit overall needs for any type of reinsurance capacity,” said Anger.

According to Hum, investors in the space have generally been expanding their portfolios to balance their allocations to catastrophe bonds and collateralised reinsurance, the latter being the largest sub-sector of the ILS space, followed by the catastrophe bond market.

“Capacity continues to flow from global institutional accounts while a more recent, increasing source is coming from the retail and high net worth segments through US mutual funds and European UCITs funds. Sidecar activity will continue as interest in insurance “Beta” risk (market index) from retail based funds in the US and Europe grows,” explained Hum.

Looking further into 2018, and Anger doesn’t predict any changes to the risk profile of opportunities brought to the ILS market when compared with last year. And with the broad range of risk profiles the ILS market can assume, Hum said sponsors will likely grow in type and number, “as they seek the most efficient capacity based on pricing and other terms/conditions, and will incorporate ILS appropriately,” added Anger.

“Having access to third party capital is increasingly seen as a measure of senior management’s preparedness to be successful in a changing environment,” said Hum.