Collateralised reinsurance & ILS could hit $160bn by 2020: LGT’s Stahel

The insurance-linked securities (ILS) and collateralised reinsurance market could more than double in size by 2020, growing from the roughly $70 billion of capacity it provides today, to as much as $160 billion, according to LGT’s Michael Stahel.

Writing in a newly released report, Michael Stahel, Partner at LGT ILS Partners Ltd. the insurance and reinsurance linked investment specialist unit of private banking group LGT, forecasts that the ILS market may outstrip overall catastrophe reinsurance market, resulting in an increasing market share for the collateralised reinsurance product.

Today, at roughly $70 billion in size, consisting of catastrophe bonds, other ILS, collateralised reinsurance and vehicles such as sidecars, the collateralised market share of global catastrophe reinsurance is around 18%.

But by 2020 the collateralised portion of the reinsurance market is set to outstrip the overall market, more than doubling to as much as $160 billion, to reach around 30% of total global catastrophe reinsurance capacity.

Stahel explains in the report; “We estimate that the current market for collateralised protection will more than double in size, from a current USD 70bn to an estimated USD 160bn by 2020 – whilst the natural growth of the market for catastrophe reinsurance capacity is a modest 3% to 5% per annum.

“Based on this growth, the collateralised market will make up more than 30% of the overall catastrophe reinsurance market by 2020 compared to about 18% today.”

Given the impressive growth and expansion seen in ILS and the collateralised reinsurance product over recent years, Stahel said that there is an expectation that increasing amounts of reinsurance purchases will be placed through collateralised or ILS transactions as part of insurers strategies to meet capital requirements such as Solvency II.

With reinsurance buying likely to be increasingly focused on solvency capital requirements, Stahel said that he expects Solvency II will assist the ILS markets continued growth. Which will result in reinsurance buying becoming “part of an overall solvency equation rather than a standalone “risk protection” task.”

With capital efficiency expected to drive the purchase choices for many ceding insurers in years to come, ILS and the collateralised product stand a very good chance of increasing their share of the global reinsurance market.

Stahel also noted in the report that as the fully collateralised product also removes credit risk from the counterparty equation, given the focus on solvency “the market for ILS and CRI is expected to substantially grow in the years to come.”

The new report has been published by Clear Path Analysis this week. Titled ‘Insurance-Linked Securities for institutional Investors 2016‘ it features interviews and essays from industry leaders in the ILS and collateralised reinsurance market.

The report notes the desire to expand ILS and collateralised products outside of pure catastrophe insurance and reinsurance, which could accelerate the growth of this market beyond any projections (as forecasts tend to be focused on property catastrophe risks).

The introduction of Solvency II is seen as a key driver for ongoing ILS and collateralised reinsurance growth, as Stahel’s comments explain. But it is also anticipated to result in growth for life ILS as well, as life insurers also look to risk transfer for solvency purposes.

Javier Rivas, Head of Life Products at Credit Suisse Insurance Linked Strategies, commented; “As a consequence of new Solvency II regulations, many insurance companies in Europe are trying to find out how to optimise their risks and capital positions, which can result in a new wave of reinsurance transactions, in which Life ILS can participate.”

Greg Hagood, Co-Founder and Managing Partner at Nephila Capital, explained that the ILS asset class continues to be attractive for institutional investors.

“Our position is that ILS is still attractive as the asset class has a positive expected return and is not correlated to the broader financial markets,” Hagood explained, adding, “The traits of the asset class are both rare and valuable.”

He continued, explaining that as global capital markets become increasingly correlated due to growing interconnectivity, investors are looking for diversification, meaning that; “Something that is truly not correlated that has a positive expected return will continue to attract capital.”

It is this continued investor interest, combined with the aforementioned likelihood of increasing use of the collateralised reinsurance and ILS protection, that together will stimulate the ongoing growth that Stahel mentions in the report.

With investors keen for opportunities in risk assets which demonstrate low-correlation, low-volatility and above average returns, ILS and the collateralised reinsurance product will only see increasing demand from the capital provider side.

While on the ceding company side, the use of collateralised protection continues to grow and new regulatory capital regimes, such as Solvency II, can only help to accelerate that demand for fully collateralised capacity.

$160 billion of ILS risk capital put to use in the global insurance and reinsurance markets seems perfectly reasonable by 2020, although rates and the high levels of competition from traditional reinsurance markets could be factors that may slow the growth rate down.

It’s very difficult to predict growth rates when competition is so high and some traditional underwriters willing to deploy capacity into diversifying perils at pricing below expected loss, something ILS managers cannot do due to being less diversified and having return targets to meet.

But whether the $160 billion of collateralised re/insurance product is hit, or just $100 billion, one thing feels assured, further growth is coming to ILS.

The full report can be downloaded by registering your details with Clear Path Analysis here.