This is the second in our series of articles, featuring the thoughts of leading figures in insurance-linked securities (ILS) and reinsurance on the market as we move into 2015, features Stefan Kräuchi, Founder of ILS Advisers.
We asked for participants thoughts or predictions on the prospects for the ILS market, catastrophe bonds, collateralized reinsurance and reinsurance or catastrophe risks as an asset class in 2015.
Stefan Kräuchi, Founder of leading Asia based adviser on the insurance and reinsurance-linked securities market ILS Advisers, who also manage the ILS Diversified Ltd. fund of ILS funds, gave us his thoughts on how the ILS market will evolve and thrive in 2015.
His response follows in full below:
- We expect the inflow of capital from investors into the ILS space to continue, especially in the US and Europe, however Asia ex-Japan will remain a laggard. Continued investor education about the ILS asset class is therefore as important in 2015 as in previous years.
- Absent any major natural or man-made disaster loss event we expect that the downward pressure on premiums will remain.
- The combination of 1 and 2 above will continue to put pressure on ILS and catastrophe bond returns. If the U.S. Fed starts tightening, as many observers assume, this might provide at least some positive support to ILS returns.
- In absolute terms we expect the funds focusing on private ILS transactions will continue to do better than pure cat bond funds in 2015.
- As we have already seen in 2014, access and the ability to offer customized solutions to cedents remains key. ILS managers have an opportunity to differentiate themselves based on the solutions they have the capability to offer.
- Points 1 and 2 above will increase pressure on traditional reinsurance firms, especially on small monoline reinsurers and might lead to increased M&A activity in 2015.
- In 2014 we have seen ILS funds increasing the use of leverage in their portfolios in order to counter the trend of decreasing returns. Some have tried to mitigate the leverage by buying protection through ILWs, occasionally even from other ILS funds (and no, we are not expecting another industry spiral similar to the LMX Spiral of the early 90ies…), while others obtain protection from an affiliated reinsurer.”
What does this recent development mean?” we have been asking ourselves. Does it mean that “fully collateralized” is not as superior as we have come to believe? Or does it mean that some funds are moving away from the “fully collateralized” philosophy because they have found something even better by successfully adopting the philosophy and business model of typical reinsurance companies whose capacity is not fully collateralized? We expect this trend to evolve further in 2015.
Our thanks to Stefan Kräuchi for his time.
Like to be featured in an interview on Artemis or have some thoughts on the market for 2015? Contact us to discuss.
Artemis’ Q4 2014 Catastrophe Bond & ILS Market Report – A busy finish to a record year for ILS
We’ve now published our Q4 2014 catastrophe bond & ILS market report.
This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the fourth-quarter of 2014, looking at the new risk capital issued and the composition of the cat bond & ILS transactions completed during Q4 2014. It also includes a brief review of the full-year 2014’s record issuance.