Alternative capital “not even retreating to any great extent” – Peiser, WTW

Alternative reinsurance capital is not going away after the recent losses it has experienced, in fact “it’s not even retreating to any great extent” according to the Global Head of Broking at Willis Towers Watson.

After the significant catastrophe losses experienced, as well as issues with loss creep and trapped collateral, it had been assumed that investors in insurance and reinsurance would get cold feet.

At the same time, the loss creep issue and mechanics behind collateral retention, trapping and loss, may not have been as well understood in all investor quarters as would have been desirable, resulting in some surprises.

But this hasn’t been seen to have the effect on the ILS market that some might have predicted, it seems, with Joseph Peiser of Willis Towers Watson (WTW) explaining in a recent Insurance Marketplace Realities 2020 report that investors largely remain committed to the ILS asset class.

“Alternative capital is not going away. It’s not even retreating to any great extent. Many institutional ILS investors are in it for the long term,” Peiser explained.

In fact, Peiser and WTW see interest in increasing allocations to ILS and reinsurance in the investor community, suggesting that the market could be poised to expand as opportunities allow.

The report explains that, “There are pockets of interest in the investor community to increase stakes in the property reinsurance industry, given the rising rates.”

As investor interest grows again the benefits will ultimately flow to buyers of protection, as ILS and alternative capital first helps to moderate reinsurance pricing and then ensures the availability of efficiently priced capacity for insurance buyers as well, Peiser suggests.

In addition, advances in technology and underwriting practices helping to encourage more capital into the ILS market in years to come.

“Moreover, as modeling capabilities get ever more sophisticated, the ability of the market to profitably underwrite this short-tail line increases — even in the face of systemic climate risk,” Peiser wrote.

WTW believes that the market is searching for a new equilibrium, based on recent loss costs, capacity and appetite for underwriting risk.

Part of the equation is clearly around the availability of capital, but importantly also around the appetite of that capital to underwrite and at what cost.

“The alternative capital market is showing some renewed enthusiasm for the reinsurance market after a year or so of tepid interest,” Peiser explains, which he and his employer WTW believe is a positive sign and reason for optimism for insurance buyers that may just be focused on rising pricing right now.

Peiser’s comments were borne out in fresh capital raises by a number of ILS fund managers around the January renewals, which we documented recently here.