The capital markets are becoming increasingly influential in reinsurance, according to broker Aon Benfield, who recognises that the growth achieved by insurance-linked securities (ILS) specialists puts them on an ever more even footing with traditional reinsurers.
The steady growth of alternative capital has transformed the reinsurance landscape. It’s undeniable that the re/insurance market is better off for it, in terms of the efficiency of its product offering and the cost of risk transfer.
While some might bemoan the disruption it has caused and the competition now faced, the entry and subsequent growth of alternative capital has forced traditional reinsurance firms to rethink, sharpen their pencils (so to speak) and improve their offering, both from a cost and quality of coverage perspective.
In some areas of the market, ILS fund managers are already considered the leaders, a fact which is unlikely to be reversed anytime soon as growth continues, driving this influence higher.
As alternative capital expands further, enabling ILS portfolios to become increasingly large and diverse, the true efficiency of capital markets funding and risk management techniques can be realised by the market.
At the same time, alternative sources of capital are being used as additional balance-sheets to allow reinsurers to achieve expansion of the top-line, without losing control of net exposures.
In fact, it’s not just reinsurers, there are innovative insurance companies which have established structures to enable them to access alternative capital for self-reinsurance, read business optimisation, purposes. A trend that is set to continue as both insurers and reinsurers look to borrow from the ILS playbook, to add efficiency to their capital.
Aon Benfield notes that ILS and alternative capital continues to have a disproportionate effect on U.S. property catastrophe reinsurance and global retrocession markets, where its influence remains greatest.
Part of the reason for this is the suitability of these shorter-tailed, peak peril lines to ILS capital, given the “collateral provision and rollover favors lines of business with early loss recognition and risk assessment is dependent on reliable modelled data,” Aon Benfield explained.
However, this is now beginning to be applied to other areas of the market, the broker said, which is both helping to stimulate more growth, as diversity aids the ability of ILS asset managers to increase their portfolio sizes, and further heightening the influence of alternative capital markets in reinsurance.
Of course, the ongoing growth of ILS and the increasing influence it wields is now applying further pressure on pricing, not pushing prices down significantly but certainly moderating the hoped for price rises after 2017 catastrophes.
These losses “generally fell within published risk tolerance ranges” for most investors and ILS fund managers, Aon Benfield notes, hence the ILS market has been able to continue wielding its efficiency and kept rate rises to a minimum.
There has also been the factor that an element of additional capital and new entrants to ILS have come to market after the losses of 2017 and their rate expectations have not been much higher than where the market sat prior to the hurricanes, which has exacerbated the ability of underwriters to command payback.
As alternative capital continues to cement itself ever more firmly into the fabric of insurance and reinsurance markets, incumbents have no choice but to aim for greater efficiency themselves, which in many cases involves the use of ILS market techniques and capacity.
We now see re/insurers vying for capital with ILS fund managers, as both seek to raise funding from the same sets of institutional investors. Re/insurers can often promise more origination, preferred access to risk and other factors related to their heritage, but here the ILS funds are on an increasingly level playing field, as their own access to risk increases.
In fact, some ILS fund managers are able to compete on origination, bringing portfolios of risk from the front of the value-chain to their investors, often with a greater ability to disrupt the intermediation of risk, enhancing their margins and offering preferred returns.
The competition around origination, access to risk and sourcing from the front of the value-chain is set to intensify, especially as re/insurers look to be all things to all men, while brokers increasingly look to attach their pipeline of risk directly to the capital markets.
Everyone wants to earn the highest margins they can from re/insurance business, meaning the disruption we’ve seen in recent years may be nothing compared to what we’ll see in the years to come.
As this disruption, or change, continues, ILS will have a central role to play, as its influence positions it as among the most efficient capacity sources in the marketplace.
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