The reinsurance cycle will continue, but future peaks and troughs will increasingly be shaped by capital market appetite for insurance risk, thinks Lixin Zeng, chief executive of AlphaCat Managers Ltd.
Speaking to Artemis around the time of the Rendez-Vous de Septembre in Monte Carlo, Zeng also said that market corrections in the aftermath of major catastrophe losses would be less pronounced than they had been in the past.
“I personally believe prices will continue harden after a loss and soften after a period of no loss, but the magnitude will be driven by trading relationships as opposed to capital adequacy,” he explained. “From a capital supply and demand perspective the reinsurance cycle is probably going to follow more of a capital market cycle.”
When investors shift into the traditional fixed income and equity markets driven by high bond yields and attractive stock valuations, the overall supply to ILS will go down, and vice versa, explained Zeng. And it will be these fluctuations of capital market capacity that will have more influence on whether reinsurance rates will soften or harden than loss activity.
“The premium the reinsurance business can allocate to support a given level of risk will fluctuate in sync with the overall capital market premium,” he said.
Demand by investors for catastrophe bonds remains particularly strong, according to Zeng, with supply barely keeping up. At the time of writing total catastrophe bond issuance had reached $11.6bn in 2018, according to transactions tracked by the Artemis Deal Directory.
“The appetite of investors to purchase cat bonds has outstripped the availability of new issuances,” he said. “During the second quarter of this year, the market value of hurricane-exposed bonds did not reflect the fundamental fact that there is virtually no hurricane risk in this period, and to me that’s a sign that there’s a higher demand than supply.”
While the natural catastrophe losses of 2017 were a test for ILS investors, Zeng does not believe the events or claims magnitude came as a surprise.
“ILS investors understand these type of losses are part of the business,” he said. “They followed their asset allocation strategies and have exhibited a high level of discipline. So when one asset class goes down you rebalance and allocate additional funds to the asset class.”
“For ILS investors the catastrophe losses are manageable from the perspective of their entire portfolio,” he continued. “The whole reinsurance segment is a small drop in the bucket.”
“In addition, there is little surprise because ILS investor have collectively done a great job educating themselves about this type of risk.”