ILS capacity flight unlikely, even in another bad catastrophe year: Schinnerer CEO

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Christopher Schaper, the Chief Executive Officer (CEO) of the Schinnerer Group, the underwriting manager and managing general agent arm of broker Marsh, believes that were 2018 to be another costly catastrophe year for the alternative capital space, it’s still unlikely capacity would flee the sector.

After the impressive and mature response of the insurance-linked securities (ILS) market to 2017 catastrophe events, underlined by hurricanes Harvey, Irma, and Maria, earthquakes in Mexico and wildfires in California, questions around the permanence of ILS capital have been put to bed.

The marketplace reloaded and actually increased in size in time for the January 2018 renewals season, cementing its growing presence in the global insurance and reinsurance industry as an important, beneficial and efficient base of willing and able risk capacity.

In a recent interview, the Schinnerer Group CEO highlighted the reaction of the ILS investor base following the losses experienced in 2017, citing data from reinsurance broker Guy Carpenter that 9% more alternative capital actually entered the space at the end of 2017, “and that’s after providers replenished lost capital.”

But while the response of the ILS market to what’s been described as its first real test is now evident, how might the marketplace react were catastrophe losses in 2018 to be similar, or even higher than that witnessed last year? Would that cause the investor base to exit the insurance and reinsurance sector and look to other alternative investments for yield?

Schaper doesn’t think so, and explained that while pundits are on both sides of the fence, “from this vantage point, alternative capital flight seems unlikely.

“One reason is the consistent reaction following major events, such as hurricane loss,” said Schaper.

Historically, the re/insurance industry has attracted investment after a large loss year, explains Schaper, suggesting that were large events to occur in 2018, then just like in 2017 and other notable loss years there’s good enough reason to believe capital would look to enter the space.

This is in part driven by the expectation of securing higher reinsurance rates in response to a shift in market dynamics post-event, something alternative capital providers looked to take advantage of at the January 1st 2018 renewals, as did traditional reinsurers.

Although, the presence of alternative capital at 1/1 has been said to have been a dampener on typical post-event price surges, further supporting the notion of a new reinsurance market normal underlined by a flatter underwriting cycle.

As noted by Schaper, for 2018, current forecast are predicting an above-average level of hurricane activity in the Atlantic, with the probability of a Category 3, 4 or 5 storm making U.S. landfall being above the average for the last 100 years by 11%, at 63%.

“Another reason (alt capital flight seems unlikely) is the room to deploy more capital. With $1 trillion earmarked for insurance risk and $82 billion invested in 2017, alternative capital providers have much more capital to allocate to insurance risk. Relative to the size of the global insurance and reinsurance marketplace, alternative capital participation represents a small percentage,” continued Schaper.

In recent times, the size of the alternative reinsurance market has grown year-on-year, often outpacing traditional market growth as investors become increasingly understanding of the catastrophe risk landscape and look to take advantage of investment that has low-correlation to broader financial market movements, while providing valuable diversification benefits.

But as noted by Schaper, even with recent growth and market expansion, ILS investors such as pension funds only invest a very small portion of their allocation to the ILS space, typically 1-3%, suggesting there’s ample room for further market expansion both in the catastrophe space and elsewhere, such as in emerging risks and regions.

“The future is uncertain. Catastrophe losses in 2018 may turn out to be heavy, or they may be light. What would be the financial impact if three major storms significantly greater than Harvey, Irma, and Maria struck the U.S. coastline in sequence or if another major natural catastrophe coincided with a single major storm?

“Fortunately, the global insurance industry—and its capital—has yet to experience that phenomenon in its core markets. Until it does, investor interest in supplying capital for insured risk is likely to continue to rise. If such loss events were to occur, a similar response appears likely as well,” said Schaper.

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