Sophisticated buyers of collateralized reinsurance protection, from insurance-linked securities (ILS) managers, funds, sidecars and other structures, are becoming increasingly discerning, as the product matures and buyers examine ILS offerings more closely, according to Willis Re.
Protection buyers, now having accepted the fully-collateralized reinsurance product within their coverage programs, are increasingly going a step further, seeking to identify the benefits of, or any differences between, mandates, offerings and also structures.
Willis Re highlights this trend in the reinsurance brokers latest renewals report, which we covered in more detail previously here.
It also ties in with sentiment we at Artemis hear in discussions with cedents and potential buyers of collateralized protection, that increasingly they want to identify not just the cheapest source of risk transfer capital, but also the most efficient, best-managed and best structured as well.
This is a natural function of a healthy market that is maturing. As the cedents gain increased understanding of the collateralized reinsurance product offering, while at the same time the number of ILS markets and structures offering the product expands, the need to differentiate increases.
As reinsurance protection buyers become increasingly discerning, ILS managers and funds serving them need to be increasingly prepared to sell their case.
That means having an experienced and talented team of underwriters, analysts and modellers, access to the necessary capital, structural options for the cedent to utilise, perhaps access to a front and maybe even some leverage or way to provide a reinstatement option.
The strong growth of the ILS space, to the estimated $65 billion of capital or greater, has led to a proliferation of ILS fund managers, Willis Re explains. A growing majority of these fund managers offer collateralized reinsurance, alongside investing in catastrophe bonds and other instruments and the range of choices is forcing buyers to become more selective.
Willis Re explains; “In a maturing market, sophisticated buyers of collateralized re are starting to look more closely at the operational models of ILS fund managers, in particular at their investment mandates and at the opaque area of how they are allocating risks to the funds they are managing.”
This additional scrutiny on ILS managers is being driven, Willis Re says, by the need for compliance at the buyers. It is putting additional overhead on completing the collateralized reinsurance transaction in some cases, we hear.
“Larger ILS fund managers and traditional reinsurers with associated fund management operations are likely to be better able to respond to the requested degree of transparency required by buyers,” Willis Re continued.
This positions the larger and most established collateralized reinsurance markets and ILS fund managers well, as their greater scale, more established teams and often longer track record, will all help to satisfy these increasingly discerning protection buyers.
As the ILS market continues to develop and the collateralized reinsurance product evolves, so to will the choices available to buyers. The negotiation process will increasingly be important for ILS players, as the cost of cover becomes more balanced between traditional and alternative, meaning ILS players need to understand how best to sell their products to potential customers.