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Original Risk: A Society for Change Agents

Execs forecast further growth for ILS and collateralized reinsurance


Leading insurance-linked securities (ILS) and reinsurance executives forecast continued growth for the ILS and reinsurance convergence sector, with more investment from the capital markets expected and the eventual transfer of risk across exchanges.

Speaking this morning in London at an event held by our ILS sector media compatriots Trading Risk, a number of leading ILS and convergence executives are discussing the market and some of the trends they foresee over the coming years as ILS and its capital market investors continues to grow its share of the global reinsurance market.

In another example of the real-time information world that we now live in, a person we follow on the social network Twitter is tweeting his way through the talks, providing valuable insights coming from the speakers at what looks to be a very interesting event.

David Worsfold, who you can find and follow on Twitter here (find and follow Artemis on Twitter here too, of course) is live-tweeting the event in London.

Here are a few of the highlights, as we see them, thanks to David’s tweets. Please note that we’re paraphrasing from real-time tweets made at this mornings event, so while we endeavour to ensure accurate representation of speakers quotes it cannot be 100% guaranteed.

First to speak at the event was Michael Millette, Global Head of Structured Finance at investment bank Goldman Sachs. Millette began by reflecting on the record levels of catastrophe bond issuance seen so far in 2014, saying that we could be headed for record territory this year. We’ve noted this record level with the first time we’ve ever recorded over $10 billion of new issues in our Deal Directory in a 12 month period.

Investors are continuing to gain comfort in the ILS and reinsurance space, with significant interest in taking on insurance and reinsurance risks, Millette said, adding that investors now feel they have a better understanding of the sector. This is important to note as it reflects an investor base some of who, while perhaps reducing allocations to the space on the reduced pricing, will likely be remaining invested to a degree and ready to take advantage of any new insurance linked investment opportunities.

Millette noted that cat bond portfolios can have huge diversity within them and hedge funds like the high risk – high return profile of an investment opportunity in catastrophe risk.

On pricing and the steady decline seen over the last 18 months or so, Millette said that he expected the price move that began in Q1 2013 to have largely run its course by now. Readers will have noted that recent catastrophe bond transactions have seen pricing move towards the upper ends of coupon guidance, reflecting the fact that pricing is at or approaching a floor.

Big data, a topic that you really cannot attend a conference in any sector this year without hearing mentioned, is a key part of the foundations of reinsurance convergence, according to Millette, who said that seeing convergence in the 1980’s wouldn’t have been possible, with the data and technology we have today helping to drive the reinsurance convergence trend.

Finally, Millette said that he expects to see growth in exchange traded catastrophe funds, an area of the market which is currently small but could grow within reinsurance convergence.

Also speaking at the event was Tony Ursano, CEO at insurance and reinsurance broker Willis Group’s investment banking and capital markets unit Willis Capital Markets & Advisory. Ursano’s talk appears to have focused on looking ahead to the future for the ILS and reinsurance convergence space.

Ursano said that by 2024 third-party capital in reinsurance, so ILS, catastrophe bonds and collateralized reinsurance capacity from investors, is expected to grow by 200%, from the roughly $50 billion WCMA estimates today to $150 billion. However this growth will not be a straight line and some fluctuation in growth rate is to be expected.

Helping the market to grow will be growing interest from traditional asset managers who will increasingly be attracted to the sector as reinsurance and ILS become a core investment strategy, said Ursano.

Ursano also said that significant consolidation can be expected over the next ten years. It’s not clear whether this is just in reinsurance or in ILS specialists as well. In Artemis’ opinion it is hard not to foresee consolidation in both areas, as well as between both areas, as sources of capital become ever more blurred by greater participation of third-party capital in reinsurance.

Ursano expanded, saying that it is expected that investment bankers and re/insurance brokers will converge, a trend already being led by units at brokers such as the WCMA unit he leads. Hedge funds will continue to operate in reinsurance as well and as many as 10 could go public, which we assume refers to hedge fund backed reinsurers who increasingly seek listings as they grow their reinsurance units.

Interestingly, Ursano also forecast that by 2024 as much as 40% of Lloyd’s of London’s capacity could be sourced from non-corporate third-parties. Ursano said that this would be Lloyd’s ‘rediscovering its roots’, a great comment on the oldest insurance and reinsurance market in the world’s recently launched strategy to embrace investor capital for a new phase of its growth.

Finally, Ursano agreed with Millette from Goldman Sachs that a significant amount of insurance and reinsurance risk will be exchange traded in the future with the help of indices. This has been predicted since the ILS market began, and perhaps before, as experts hoped that simplified, transparent, exchange traded risk instruments would emerge, leading to fully liquid and traded markets in reinsurance and catastrophe risk. It’s encouraging to hear that this remains a goal of the market.

Other speakers included Aditya Dutt, President of Renaissance Underwriting Managers, Ltd., the unit of reinsurer RenaissanceRe which deals with ILS and third-party capital. Dutt discussed the hybrid model, of balance sheet and third-party capital, which RenaissanceRe itself follows, saying that this model has its challenges due the need to manage the conflict of being both principal and agent. Dutt also discussed risk modelling, saying that the danger of models is that they produce an apparent consistency which can mask uncertainty and fool underwriters.

Dirk Lohmann, Founder & Managing Partner at Swiss-based ILS investment specialists Secquaero Advisors Ltd., also spoke at the event. Lohmann said that there is a question over the impact of non-specialist investors on secondary pricing as hurricane season begins, a question we have heard raised by other ILS investment specialists in recent weeks. Lohmann also said that there is limited room for growth in catastrophe risks currently, again a concern many investment managers share and which sees them carefully controlling inflows in order to ensure adequate capital deployment opportunities remain. Lohmann also highlighted the risk posed by over regulation, saying that there seems to be a race among regulators to see who can be the most conservative.

That’s all we’ve gleaned from the excellent tweets provided by David Worsfold, which once again provide a great example of why, even in a niche financial market like ILS social media is an important tool for brands and people to leverage.

It’s encouraging to hear executives continuing to forecast further growth for the ILS and reinsurance convergence market, as well as the expectation that innovative products will emerge such as increased exchange trading of risk.

Register today for ILS Asia 2023, our next insurance-linked securities (ILS) market conference. Held in Singapore, July 13th, 2023.

Artemis ILS Asia 2023 - Insurance-linked securities conference in Singapore

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