Reinsurance giant Hannover Re continues to take advantage of the expanding insurance-linked securities (ILS) sector, and sees further opportunities in a marketplace that is “here to stay,” according to Henning Ludolphs, Managing Director of Retrocessions & Capital Markets at Hannover Re.
Artemis recently discussed Hannover Re’s view of the ILS market with Ludolphs, exploring the outlook of the sector following the events of 2017 and the impressive response of the investor and sponsor base, as well as what areas of the sector the Germany-based reinsurer sees opportunities going forward.
He explained that the ILS market passed an “important”, but not “the big test” in 2017, paying losses in line with agreed documentation, and actually reloading and increasing in time for the January 1st, 2018 renewals season.
“We believe the ILS market is here to stay,” said Ludolphs.
“The main reason for our view is the diversification benefits for investors that ILS instruments offer. A change in interest rate does not cause an earthquake. In addition, investors who take long-term views, like pension funds, are an important contributor to the investments in insurance-linked securities. This is different to the likes of hedge funds, who may make more opportunistic decisions and reallocate money to other financial markets more rapidly,” he added.
The response of the ILS market and its continued expansion, so far in 2018, has underlined its permanence and commitment to the insurance and reinsurance industry, and Artemis was eager to hear Hannover Re’s views on the ILS space, both now and moving forward.
“Hannover Re takes advantage of the growing ILS market,” he said.
“As in the past, large portions of our retro programs go to ILS investors, our K-Cessions quota share has increased to USD 600 million in 2018. Our transformer service remains dominated by the collateralised fronting model where we front approximately 1300 reinsurance contracts for the ILS investor community with overall first limits of around USD 4 billion. We expect moderate growth going forward.
“In 2018, we had another very good year. So far, we have successfully worked on four catastrophe bonds with an overall volume of about USD 1.4 billion – and this may increase further – which brings us to around USD 4 billion since 2015. We consider this a great track-record.
“Not many catastrophe bond issuances involve a professional reinsurer as transformer but in particular natural catastrophe pools and associations see a variety of benefits including professional support on legal documentation, outsourcing of certain administrative work as well as execution certainty and speed. Having a professional reinsurer as a counterparty allows a certain distance to the capital markets with their different ways of looking at things and different set of regulations.
“We are proud of having been chosen as transformer for a number of catastrophe bond issuances. We look positively ahead and believe to have good opportunities to provide support on future catastrophe bonds issuance, new and renewable ones,” continued Ludolphs.
The catastrophe bonds that Hannover Re has worked on, so far in 2018, include the $500 million FloodSmart Re Ltd. (Series 2018-1) deal; the $400 million Acorn Re Ltd. (Series 2018-1) deal; the $400 million Alamo Re Ltd. (Series 2018-1) deal: and, the $79 million Integrity Re Ltd. (Series 2018-1) deal.
As highlighted by Ludolphs, Hannover Re is active in various sub-sectors (such as collateralised reinsurance, catastrophe bonds, and retro) of the ILS space, and while the large focus is on property catastrophe business, as is the case with much of the broader ILS market, he explained how the reinsurer is also transforming life risks for ILS investors.
“Last but not least, our ‘youngest kid on the block’, our life transformer unit, has transferred several risks to ILS investors and we are seeing good opportunities going ahead. All transactions were private transactions and hence unfortunately they cannot be made public,” said Ludolphs.
Property catastrophe risks, and especially in the U.S., remains the large focus of ILS capacity, but the sector is starting to expand its remit in a more meaningful way and influence other areas of the global risk transfer market.
Ludolphs discussed with Artemis the potential for further diversification of risks in the ILS market.
“Terror and cyber risks are already finding support among ILS investors and we expect that to continue. Expanded modelling, for example for flood risks, will make those more suitable for ILS investments.
“Whether casualty risks will also find more attraction by ILS investors will have to be seen. So far, there is no shortage of capacity and ILS investors cannot simply assume casualty risks due to the long-term nature of the development of potential losses in that space. Hence, another party (for example a reinsurer) would be required to take the tail risk. However, that means there will be additional costs, which have to be compensated through the original pricing. Therefore, at least some doubts are justified,” said Ludolphs.
Latest estimates put the size of the ILS market at roughly $95 billion, which means it now accounts for 16% of global, dedicated reinsurance capital. Ludolphs expects further market growth in the future, driven by numerous forces.
“The world’s insurable values will go up, risks like terror and cyber will find more attention, more risks will be subject to modelling and the desire to reduce the protection gap will fuel opportunities for ILS investors. In particular, the protection gap will find increased attention from government and semi-government institutions in order to structure suitable concepts to help the poor and the vulnerable in the world. Many of such structures are on parametric trigger or index–basis, which usually suits ILS investors well,” said Ludolphs.