Cedents are increasingly looking to diversify away from the “rhetoric” of the traditional reinsurance market and this is one of the factors causing Paul Schultz to be very constructive on catastrophe bond market development right now.
Schultz, the CEO of Aon Securities, the insurance-linked securities and capital markets arm of the reinsurance broker, discussed ILS market trends and his expectations for shifts in appetite from investors at a Munich Re hosted panel discussion in Monte Carlo this week.
Commenting on the run-up to the end-of-year reinsurance renewals, Schultz said, “We are preparing for a supply demand imbalance that we haven’t seen in a while which obviously then leads to different sort of implications for the marketplace.
“The supply demand imbalance will create different dynamics, a much more challenging market as we go into the January 1 renewal, where as everyone knows in this room, a good percentage of the property cat market renews, but that that is still going to continue with us in ’23.”
He explained that of the different ILS market segments, he anticipates further cat bond growth at this time.
Saying, “I think the cat bond bucket is going to expand, probably at the expense of some of the other buckets.
“It’s a place in the market where returns have actually been pretty good, seems to be where the risk tolerance and the risk-returns benchmark sort of meet up with the allocators to the space, much more so than collateralized reinsurance.”
“Collateralized reinsurance is likely to probably grow the the least of the three buckets,” he added.
The final bucket is ultimate net loss retrocession coverage, which Schultz believes should see some new investor allocations, likely to fill gaps in the market.
Explaining, “UNL retro still offers interesting risk-return dynamics, so I think we’ll still see some capacity there, maybe down, but certainly capacity there, as opportunistic investors continue to support their business.”
Schultz commented on some of the drivers in the ILS and reinsurance market at this time.
“It’s a very interesting time. It’s an interesting time because we’ve seen a lot of frequency, losses coming that the market hadn’t anticipated, returns over the last five years being less than acceptable,” he explained.
“As we’ve seen in the first six months of this year, there’s been a re-underwriting, if you will, of that business, which for those of us on our side of the table, it was a challenging early part of the calendar year, but actually much more stable as we got into May in June.
“We expect that stability now to continue in the ILS market and talking about cat bond market specifically to continue.”
All of which makes Schultz constructive on the prospects for the ILS market, in the catastrophe bond segment, but part of this is that ceding insurance and reinsurance companies are looking for reliable capacity and perhaps lately the cat bond market is increasingly being seen as that, at a time when traditional reinsurance capacity has been shrinking.
“We’re actually pretty bullish about the pipeline,” Schultz said. ” We’re seeing more cedents look to diversify away from the rhetoric of the traditional reinsurance market, which is, you know, we’ve seen a number of companies saying they’re going to reduce the amount of cat that they write.
“So we’re seeing cedents that issued a long time ago come back into the market and we’re seeing the pipeline grow.
“It’s actually a pretty interesting time.”