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A more thoughtful ILS market. Capital inflows set to resume: Schultz, Aon


The insurance-linked securities (ILS) market is taking a more thoughtful approach to the way it does business in the wake of recent catastrophe years, while fresh capital is expected to flow in over the coming months, according to Paul Schultz, CEO of Aon Securities.

paul-schultz-aon-securitiesSchultz was speaking this morning in London, UK, at the Aon United ILS event, held by the insurance and reinsurance broking giant.

Discussing the current state of the ILS market Schultz was clearly optimistic, both in the way the ILS sector has dealt with the difficult catastrophe loss situation of the last two years and how it is trading forwards, putting learnings from the experience into practice.

Schultz began, “We’ve definitely seen an interesting time in the market the last couple of years. Activity that we’re seeing around the capital markets business today is very different to a couple of years ago.

“Less in volume might be one way to talk about it. But I think more thoughtful transactions are coming to market on behalf of clients and certainly investors are looking at the world with a new filter today.

“So, it’s a much more thoughtful process I think. One sign of continuing maturity in the market.”

These encouraging words suggest that Schultz, an executive with a long history of leading ILS transactions to market, from catastrophe bonds, to sidecars and other collateralised reinsurance arrangements, feels the positive response has led to a meaningful desire to demonstrate discipline and diligence going forwards in the ILS space.

Which will resonate well with investors still watching the ILS market for signs of regrowth and a chance to allocate to the reinsurance linked returns that the sector can offer.

Schultz continued, “By no means are cedants and clients walking away from this market. In fact, they’re potentially embracing it more. There’s more to come, I think a lot of good things.”

He went on to explain that the response to the losses has led to different approaches emerging in the ILS market as well.

“How we marry the capacity from markets and how we marry interest from clients will change over time.

“Certainly we’ll see some preferences change from the investor base, in what they want to write and how they expose their capital, things like that. We’ve certainly seen that manifest a bit this year as well,” he explained.

But perhaps the most encouraging statements from Schultz were around capital raising and the fact that he expects new inflows to begin imminently, as investors look to put capital to work in ILS and reinsurance markets.

He described some of this as “fresh capital” as well, which likely reflects some of the initiatives that have been churning away in the background of the ILS market, in some cases for a number of years, as well as the entry and rising interest of large investment management groups such as Pimco, Invesco and others.

He commented that, “In terms of new capital, fresh capital coming into the space, obviously 2019 has been quite different to the prior couple of years.

“There’s a lot we can learn from that. There’s certainly some education involved for end-capital providers, on behalf of the ILS managers and the entire market.”

But he added, “We have seen signs of fresh capital coming in, so we think some capital will come in Q2, certainly some more in Q3” while the fourth-quarter and year-end could see further capital if deployment opportunities allow, his comments suggested.

Schultz believes that the ILS market can resume the growth path it had prior to the recent catastrophe loss years, which is precisely what ILS fund managers and end-investors have been working hard towards, as they deal with issues surrounding loss creep and trapped collateral.

By dealing with these issues diligently and preparing a solid base for trading forwards, the ILS market looks set to come out the other side perhaps a little bruised by the experience, but certainly not battered.

“We’re expecting new cash to come in and at some point we’ll resume the trajectory we’d seen prior to some of the disruption of the last couple of years,” Schultz said.

It’s been said many times that the ILS market comfortably weathered the impacts of losses, although the issues of loss creep and trapped collateral have proved more trying.

But with a focus on collateral, terms and how their money is deployed, ILS funds have been creating a better base for future growth of the ILS market.

So, it’s encouraging to hear Schultz say that growth is expected to resume.

On top of this more robust ILS market base that is being created, the next phase of ILS capital growth could quickly become a much more meaningful and important capacity pool, to the benefit of the wider insurance and reinsurance market, as well as the third-party investors backing the risk.


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