In the fourth of our prediction pieces, where we ask a leading participant in the insurance-linked securities, catastrophe bond and reinsurance convergence sectors to give us their opinion on how these sectors will evolve in 2012, we spoke with Bill Dubinsky, Managing Director, Willis Capital Markets & Advisory, the capital markets arm of global insurance broker Willis Group. We asked Bill for his thoughts on where the market was headed in 2012.
His response follows below.
We see two key likely trends in 2012. First, specialist investors continue to gather assets to deploy in insurance event risk. The European sovereign debt issues may slow this trend temporarily but it persists. This bodes well for the broader convergence market including collateralized reinsurance, insurance-linked securities, ILWs and related products. More capital generally translates to more deals.
How this incremental capacity gets deployed is less clear. For example, 2011 saw a steady trend towards higher-risk and higher return deals within the cat bond market consistent with the investment mandates for the specialist investors. This leads to the second key trend: more and more of the investors (and sponsors) are agnostic to form between different convergent products. For example, an investor may like the liquidity of cat bonds but may also like the returns available on a collateralized retro placement. Sponsors like the liquidity discount and full syndication possible with cat bonds but they also like the speed to market of some of the other products. Relative attractiveness shifts quickly. While terms and conditions matter too; fundamentally relative pricing determines how convergence capital gets deployed.
Outside of cat risk and more generally, we continue to see the potential for innovation: new perils, new structures for old perils, and different forms of risk taking. Evolutionary innovation has the potential to marginally increase the size of the market as capital remains on the sidelines waiting for appropriate relative value opportunities. Substantial innovation, however, could make for dramatic growth. Even without innovation, we believe the convergence sector will perform well in 2012, but with it we could see a banner year.
Our thanks go to Bill Dubinsky for his time and sharing his insights with us.