Collateralised growth to continue in 2017 says Niklaus Hilti, Credit Suisse

In a recent interview with Artemis, Niklaus Hilti, Head of Credit Suisse’s insurance-linked securities (ILS) division suggests a continuation of the shift towards collateralised reinsurance placements, and expects cat bond issuance to remain at current levels in the year ahead.

Emerging, large-scale risks such as cyber also present an opportunity for the ILS space, and Hilti was keen to discuss this as well as the disruptive influence of technology and innovation, along with other expectations and potential outcomes for the ILS space in 2017.

Could you discuss your experience of rates and pricing at the key January 1^st 2017 renewals?

Overall the pricing was more disciplined and stable than expected. We found that the retrocession pricing was relatively stable and ILW pricing was more or less flat. On the reinsurance side, there is still some downwards pressure, although it was less pronounced / more stable when compared to the previous renewal (2015/16). On the other hand, we experienced quite some pressure on the wording and exclusions as well as hour clauses (which in our view is quite significant – especially in the US).

What can investors expect to see over the next 12 months?

We expect relatively stable returns. In our view the market can absorb quite some losses before it really starts to move premium levels upwards. We believe that the probability of such severe events driving premium levels upwards is about 10%. So there is likely a 90% chance of a pretty good year ahead.

Do you expect the trend of collateralized reinsurance outpacing cat bond growth to continue, and why?

Yes. The recent developments in the cat bond market showed that unfortunately there is some resistance of sponsors entering the market also because of their concerns around litigation in case of losses. But we are optimistic that the cat bond market remains at the level/volume where it is today. In our view the private cat bonds and ‘semi-private’ cat bonds however do not make a lot of sense, given the advantage of a cat bond is that it is a security and can be traded. In the long run that is what will make the market more efficient and will result in better covers for sponsors.

Do you expect to see any M&A activity between traditional re/insurers and ILS players in 2017?

We strongly believe there will be more M&A activity on the reinsurance side and also some segment of the insurance market. Some set ups do not make sense anymore and the industry believes that through mergers the cost issue can be solved, which is often not the case. A lot of small insurance companies and MGA’s will try to exit though selling or merging. At some point we will see a significant M&A activity on the ILS side as well, but probably only after large losses.

Any new opportunities you foresee for the ILS space?

We think cyber is a great opportunity for the ILS market to increase efficiency and allow investors to get an extra source of yield. The cyber market has the potential to grow at a much faster pace than any other segment in the industry. Other opportunities will be the electronic platforms of exchanging risks though the Internet. Be it in the insurance, reinsurance and ILS communities.

And finally, any trends that you expect to develop further in the ILS sector?

We believe the next true wave of innovation will only come in times of disruption and shake up. The industry is very good in fighting against innovation, especially in sellers markets.

Join Artemis in New York on February 3rd 2017 for ILS NYC