While challenges around capital consumption and the potential for overlap on the P&C side are clear, for investors, the insurance-linked securities (ILS) asset class represents a great opportunity to complement other private market solutions, according to industry experts.
The comments came during the second day of Prospectus 2021 – the new annual re/insurance and ILS conference from Artemis and Reinsurance News, in association with Kroll Bond Rating Agency (KBRA).
The day’s session had a focus on what matters for Chief Investment Officers (CIO) heading into 2021, and the audience was treated to a very technical and insightful debate moderated by Van Hesser, Chief Strategist, KBRA, and which featured Vincent DeLucia, CIO, New England Asset Management, Inc.; Paul Norris, Managing Director, Head of Structured Products, Conning; and Jason Pratt, Head of Insurance Fixed Income, Neuberger Berman.
Following a detailed examination of the investment environment, pre-Covid-19 and since the arrival of the global pandemic, panellists addressed various questions from the audience, including how ILS might fit into an investment portfolio for insurance or reinsurance firms.
“I’m fortunate with my days in Bermuda to have a pretty good understanding of that market,” said Pratt of Neuberger Berman. “I think we all appreciate the correlation elements, or the role that ILS and that whole marketplace can play.
“It’s challenging on the life side, just from a capital consumption perspective because these are less likely to be rated. And, I think there’s a lot of overlap, potentially, on the P&C side. But as an investor, there’s no question that now when you’re thinking about uncorrelated exposures, there’s a role to play.”
As noted by Pratt, private asset manager Neuberger Berman does have an enterprise operating out of Bermuda on the ILS front.
“It’s definitely something that we see being leveraged more broadly outside of insurance markets, more so, and is a fantastic opportunity to complement other private market solutions,” he continued.
Adding, “But, I think we’re all aware in the industry of the challenges, particularly where overlap or capital come into play, but it doesn’t mean that there isn’t a role for that segment of the marketplace in some way shape or form.”
In spite of a notable slowdown over the past couple of years, since 2012 the volume of ILS capital has grown substantially, with reports putting the amount of available alternative capital in the reinsurance industry at somewhere around $90 billion to $95 billion.
Later in the session, KBRA’s Hesser stated that in his view, we will look back on this era post the global financial crisis (GFC) as one where the rise of private capital has become a very strong pillar of the financial community.
“Policymakers wanted to take the depositories, the banks out of a lot of the riskier assets that were all over the balance sheets prior to the GFC. And, one of the beautiful things of capitalism is that capital is going to find a productive use. And, so, we’ve seen this proliferation of private capital really become again a very important part of financial intermediation.
“Big capital pools are valuable to every industry type and sector, and I think insurance is probably no different. And, so, there’s a natural value creation that can take place, especially in this kind of environment of stretched valuations, very low yields. There’s room to open up that pipeline between private capital and the insurance industry, and my guess is the industry will welcome it and benefit from it,” said Hesser.
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