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ILS continues to expand, will remain a robust market: Ghosh, Moody’s


Artemis recently spoke with Sid Ghosh, Vice President, Senior Analyst at Moody’s Investors Service about the prospects for the insurance-linked securities (ILS) space, the sustainability of reinsurers’ ROE’s and what might happen at the key January 1st 2017 renewal season.

Regarding the ILS sector, which is of the upmost importance and interest to us here at Artemis, Ghosh echoed the views of a number of industry analysts and experts in recent months that it’s here to stay.

“The scope of ILS funds are slowly expanding beyond Nat Cat and longevity/mortality risks into (mortgage insurance, operational risk), and as such the market remains robust and is here to stay,” said Ghosh.

Some in the global re/insurance landscape have questioned the attractiveness of the asset class to investors following a loss, and while a really major event might result in a “temporary pause in attracting new investors’ for the affected funds,” other funds might benefit from new investors seeking to enter the space as rates go up, explained Ghosh.

“For example, AlphaCat Management Ltd.’s (Validus) recent losses of $12 million in 2Q 2016 (from Fort McMurray wildfires and severe weather in Texas), did not stop investors, as investors injected $190 million of new money into the fund in the quarter despite the losses,” explained Ghosh

Furthermore, Ghosh told Artemis that following a large loss event “Prices could move up moderately if above-normal catastrophe losses deplete a sizable part of the industry’s total capital.”

At the 60th annual anniversary of the meeting of the reinsurance industry in Monte Carlo, Artemis heard from a number of reinsurers, such as Swiss Re and Hannover Re that demand for ILS will continue and is likely to grow, a view shared by Ghosh.

“The growth of ILS market will remain strong, particularly in the cat bond and collateralized reinsurance markets as the returns in alternative asset classes remain at historic low levels,” said Ghosh.

It’s promising to hear, and positive for the sector that large players in the reinsurance industry and analysts from ratings agencies like Moody’s expects further growth within the space, a trend that supports the increased acceptance of ILS as an alternative, diversifying and uncorrelated asset class.

Reinsurers continue to use alternative reinsurance capital as a means of lowering their cost of capital, increasing efficiency via new business models that seeks to utilize the capacity and features of the capital markets and ILS space, and Ghosh shared some views on whether this will become more widespread.

“Reinsurers have been using alternative capital as a hedging strategy to weather the tepid demand cycle also utilize third-party capital at cheap prices. But it has not broadened into other lines in a meaningful way from Nat Cat. The lack of availability of alternative capital supporting broader casualty lines limits reinsurers’ ability to use this capital to Nat cat business in the near term,” said Ghosh.

Improving efficiency in order to remain relevant and reduce costs has become ever more important for reinsurers in the softening landscape, and with ROE’s falling in the space, even during the relatively benign cat experience, the sustainability of this trend has come into question.

“Reinsurers’ reported median ROEs have been trending down and is currently in the high single digit range. 2016 ROE is expected to report a lower ROE as YOY price changes still negative, reserve releases are expected to come down (for most reinsurers), and investment returns are at historic low levels,” commented Ghosh.

Looking forward to the key January 1st 2017 renewal season, Ghosh explained that much of the same would be witnessed in the industry as was evidenced during the mid-year renewals.

“The YOY price changes (average across all lines) are expected to be in the 0% to -5% range for loss free accounts, and flat to modestly positive for loss affected accounts (from increased catastrophic events through the first half of 2016). We do expect continuing availability of multiyear deals, although other renewal terms and conditions are expected to remain stable,” said Ghosh.

Read all of Artemis’ Monte Carlo Rendez-vous coverage here.

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