ILS capital now more selective, modest retreat shows: Fitch

While capital inflows have begun again in the insurance-linked securities (ILS) sector, the fact that they took a pause and ILS capacity retreated slightly before this shows that the ILS market has become more selective, according to Fitch Ratings.

The ILS market shrank slightly slightly at the beginning of 2019, as alternative reinsurance capital contracted by around 4% in the first-quarter, according to broker Aon, driven by collateralized reinsurance loss payments and some investor redemptions.

But ILS funds are continuing to attract new capital, rating agency Fitch explained in a recent report, but the inflows being seen are at a more measured pace than seen in 2018, Fitch further said.

Investors in ILS have not had the best time of it, as the two severe natural catastrophe loss years drove immediate impacts to ILS funds and collateralized reinsurance vehicles, while ongoing loss creep and drag created by trapped collateral and impending loss payments also affects the sector.

These factors have been “challenging numerous market participants” in the insurance-linked securities (ILS) space, Fitch explained.

Resulting in a need for ILS funds to demonstrate their ability to deal with such events, as the best way to instill investor confidence now and going forwards.

“ILS funds that have minimised these issues and demonstrated a strong record of success have been able to differentiate themselves in the market, and are the most likely to see meaningful investor capital commitments,” Fitch said.

The retrocession market pull-back of certain players has eroded capacity there, which has helped to support the need for higher reinsurance rates at renewals.

This has now led to an environment where ILS funds that can raise new capital have the opportunity to deploy it at more attractive rates, making the ability to demonstrate how the losses have been dealt with key to ILS funds ability to raise new funds and capitalise on the rate environment as well.

The measured pace of inflows as well as ILS funds desire to demonstrate their abilities to investors all adds up to an alternative reinsurance capital base that has become more selective, Fitch’s commentary suggests.

The proof will of course be in how ILS capital moves forwards from here, having demonstrated its ability to take significant losses and trade on successfully.

The next few years may be critical, but the signs of disciplined underwriting and capital raising bode well.