Casualty not out of bounds as alternative capital interest grows: Willis Re

Despite lower returns across the reinsurance industry, in today’s market environment there’s more interest from third-party capital than less, as large or unmodelled losses remain benign and cedents continue to be attracted to diversified pools of capital, according to Willis Re.

At the same time there is an increasing expectation that alternative sources of reinsurance capital will move into casualty lines of business, as the length of the casualty tail-risk is no longer considered an insurmountable issue.

Albeit at a slower pace than seen in previous years, alternative reinsurance capital continue to expand and broaden its reach across the insurance and reinsurance landscape, increasing four fold over the last six years alone, said Co-President of Willis Re, and President of Willis Re North America, James Kent, at the 2016 Monte Carlo Reinsurance Rendezvous.

Discussing the global reinsurance industry environment, Kent explained that at the moment combined ratios appear to be relatively stable, “and at this point the loss activity remains low and there hasn’t been that unmodelled loss that people assume is going to knock the alternative capital that’s come in.”

“So, as a consequence, there appears to be more interest from the alternative capital and not less at this point,” continued Kent.

The latest figures put the volume of alternative capital in the global reinsurance sector at roughly $70 to $75 billion, an increase of 10% on the same period last year, and underlining that while returns might be down capital markets investors remain attracted to insurance and reinsurance-linked business via the insurance-linked securities (ILS) market.

Over the last three or four years more of the alternative capital has, and continues to come from pension funds, which compared to hedge funds, for example, have a “longer duration to their investment appetite” and also have “lower return metrics” than other ILS market players.

As a result of this, and the fact that the reported $70 to $75 billion of capital, that has focused mainly the property catastrophe arena, amounts to just 0.2% of all pension fund money globally, Kent stressed, “there is plenty more to come.”

For pension funds and other institutional investors that participate in the ILS space, the uncorrelated benefits, steady (albeit compressed) returns, and importantly diversifying abundance of capital remains very attractive, especially when compared to other alternative asset classes.

This has led industry observers and experts to expect the alternative reinsurance capital in the market to remain post-event and compress any post-event price surge, with some in the space predicting the majority of capacity to enter the space after a large loss to come from the capital markets, as opposed to the traditional reinsurers.

Rafal Walkiewicz, Chief Executive Officer (CEO) of Willis Capital Markets & Advisory (WCMA) was also on the panel with Kent, and underlined the attractiveness the diversified capital pool of the ILS world brings to their clients when questioned on the reported $7 billion of catastrophe bond maturities, that are scheduled for 2017.

It’s worth noting here that according to the Artemis Deal Directory roughly $8.2 billion of catastrophe bond transactions are scheduled to mature in 2017. The difference is likely related to the inclusion of privately placed transactions.

“For most of our clients they have cat bonds in their capital structure already,” said Walkiewicz, “I would be very surprise if the $7 billion is replaced by traditional reinsurance,” he added.

“The reason for that is that our clients want to have access to different providers of capital, so they now they think about the ILS market as a permanent alternative to traditional reinsurance,” continued Walkiewicz.

Reports across the industry in recent months cite that reinsurers, for the most part, are now embracing the ILS market as opposed to fighting it, seeking to utilise its benefits in order to reduce costs and diversify.

Currently, alternative reinsurance capital is heavily focused on the property catastrophe space, particularly when it comes to peak U.S. peril regions, and while Walkiewicz said that growth here might well continue, it isn’t going to be meaningful growth.

“Now if it doesn’t grow, then what we are looking at is how to grow the ILS market going forward, and if you look at it from the property cat side, 30% of placements out there, in some shape or form, are securitised.

“Where the growth is going to happen is outside of property cat,” said Walkiewicz.

ILS and re/insurance industry analysts and experts have discussed the growth of the convergence market into other business lines a number of times, citing a lack of modelling capabilities, education and the longer-tail nature of certain segments as potential hindrances.

Walkiewicz made a brief note around the notion of ILS entering the casualty space in a meaningful way, which was supported by Andrew Newman, fellow panelist and Co-President of Willis Re, and Global Head of Casualty, Willis Re.

“Complexity surrounding casualty duration risk is no longer an insurmountable hurdle to new forms of capital,” explained Newman.

The capital markets investors appear willing and able to assume insurance and reinsurance-linked exposures outside of the property catastrophe space, and as the investors become more knowledgeable and the risks are better understood, it’s possible that ILS could play an important role in areas like casualty, cyber and even terror.

Lower returns don’t seem to be causing pension funds and alike to exit the space, and only time will tell how the alternative space reacts after the next large, or unmodelled loss event.

Currently, the volume of ILS capital is expanding, and it will be up to the entire value chain to innovate and find ways at enabling the capital markets to move into new perils and regions, to achieve continued exponential growth.