ILS shows increasing interest in P/C specialty insurance markets: S&P

Specialty products in the U.S. property & casualty insurance marketplace is an increasingly attractive area of the market, as it offers an “attractive strategic alternative to achieving scale in the standard commercial property/casualty (P/C) insurance industry,” according to S&P.

Standard & Poor’s highlights the attractive nature of specialty insurance in the P&C insurance market, which is weighed on by reinsurance market pressures and competition from players looking to avoid price pressure in catastrophe focused lines.

As both insurance and reinsurance firms increasingly look to specialty lines, in order to avoid pricing pressure, it is serving to increase the attraction to specialty P/C risks, something which the insurance-linked securities (ILS) market and its ILS fund managers has noticed.

S&P explains; “The strong profitability of many specialty carriers has certainly attracted the attention of other insurers and outside investors. Indeed, at times it seems that every P/C insurer is trying to reposition all or part of its business as specialty in nature.”

Of course this increasing popularity of specialty risks is destined to apply pressure to that area of the market as well, but those who can secure a portion of this market, either as underwriters or risk capital providers backing MGA’s or otherwise, it remains an attractive area to diversify into.

S&P notes that the specialty insurance space is hard to define, adding that it includes; “high-hazard or nonstandard insurance, niche market segments, tailored underwriting, and both admitted and nonadmitted (excess and surplus, or surplus) lines.”

It’s also seen as an opportunistic sector, which perhaps makes leveraging new sources of capital particularly attractive if they can be raised and deployed rapidly and in an efficient manner, something the ILS space and capital market investors can certainly assist established specialty players with.

The specialty lines space is also seen as one which requires a commitment, in order to develop the appreciation and skills for lines of business that are seen as nonstandard. But players in the market are also seen to be disciplined and ready to pull-back on capacity deployed as conditions change.

S&P also notes that these specialty lines are largely commercial in nature, making them bigger risks and ensuring that there is an element of catastrophe exposure in many of them, perhaps the other thing that attracts the ILS space to this market.

But perhaps the factor most likely to attract ILS players to become risk capital and reinsurance providers to the specialty insurance space is the fact that it tends to outperform. Of course this also explains the attraction that these lines hold for reinsurance firms and other insurers looking to diversify.

“Recently, alternative capital providers have shown interest in the specialty markets,” S&P continued.

S&P cites one particular example of alternative capital and ILS gaining a foothold in the specialty market as being the arrangement between AmWINS and the largest ILS manager in the sector Nephila Capital.

The arrangement sees Nephila Capital taking a 10% participation in property insurance brokered by AmWINS and fronted by Allianz subsidiary Interstate Fire & Casualty. Thereby providing Nephila with access to new risks, which AmWINS clients benefit from a new source of capacity, further diversifying the available reinsurance capital in the specialty space.

S&P describes the arrangement as “similar to facilities the large brokers have been using in the London markets for several years.”

The benefit for an ILS manager such as Nephila with such an arrangement is the access to new sources of risk which it does not have to compete for at renewal time (in the same way), as well as “not having to invest in its own underwriting resources, and the broad diversification of risk that it will be assuming,” S&P said.

Specialty insurance is also featuring in M&A deals, with reinsurance and insurance firms keen to snap up units or teams that can provide an expansion into these markets. As the focus on specialty also increases in the ILS space and managers find new ways to access these risks, we can also expect to see greater amounts of hiring of specialty underwriters by ILS managers.

S&P expects the specialty insurance market will remain an attractive area for re/insurers and ILS players to increasingly target, with the profitability a driver for entry despite the expectation that these lines will see growing focus and as a result competitive pressure.

“Notwithstanding increased competition, we believe that specialty-lines writers will continue to outperform the overall P/C market and provide an attractive alternative to entities looking for more exposure to this market,” S&P explains.