Brent Slade, the Chief Operating Officer (COO) of ILS and reinsurance management, servicing, transformation and fronting specialist Horseshoe Group, has underlined innovation in the insurance-linked securities (ILS) market as a “bright light” in the softening global reinsurance market.
The global reinsurance marketplace continues to feel the pressures from heightened competition, low interest rates, and the inflow of alternative reinsurance capital.
But despite Brent Slade noting that this is the softest property market he had seen, ILS is consistently finding its way onto new risks and programmes, serving as a “bright light in an otherwise murky market,” explained Slade, in a discussion that was part of a recent Xuber Roundtable held in Bermuda.
The reinsurance industry’s ROEs are below weighted cost-of-capital, explained Slade, and the resultant lack of value proposition for investors is contributing to some investors looking to alternatives for capital deployment and returns.
“It’s arguable that right now when you look at the peer group on a forward earnings basis, stocks in this market are as expensive as almost anywhere, and this also explains the attractiveness of ILS for institutional investors,” said Slade.
Slade continued to note that the traditional reinsurance market has lacked adequate innovation when compared to the ILS marketplace, which he thinks is part of the reason the ILS sector has been so successful in recent times. The ILS marketplace has innovated, said Slade, “and done so as private entities, out of the scrutiny of public markets.”
Other roundtable participants also noted the influence the ILS space is having on the reinsurance industry. Kathleen Faries, Head of Bermuda for Tokio Millennium Re AG, explained how the firm is “very positive” about ILS, and sees it as a vital part of the Tokio strategy, as it has been since its inception.
The ILS market has experienced impressive growth in recent years, as catastrophe bond issuance has been seen to break records, and collateralized reinsurance placements continue to expand the reach and depth of the sector.
Brad Adderley, a Partner in the Corporate department of Appleby’s Bermuda division, expects the ILS market to continue its growth path, adding that “Bermuda will cement its jurisdictional reputation in all facets.”
Furthermore, Adderley expects that life reinsurers in Bermuda will look to increase their capital levels in response to Solvency II requirements, something that could also result in an increased use of diversifying ILS capital.
The ILS marketplace continues to evolve and adapt to the changing risk landscape, but appears to be doing so with discipline, and by bringing valuable, innovative qualities to the table.
The reinsurance market is expected to remain pressured for some time as the softening landscape shows little sign of abating anytime soon, so it’s promising for the industry that certain areas of the risk transfer landscape, such as ILS, continues to access new business and risks in challenging times.
As we wrote earlier today, capital market capacity and the ILS market is pressuring the reinsurance market to innovate.