Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

ILS fund capacity reduction a surprise for buyers: Vickers, Gallagher Re


At the January 2022 reinsurance renewals, some buyers of protection were left surprised after insurance-linked securities (ILS) fund capacity proved to be even less abundant than previously assumed, according to James Vickers, Chairman International, Reinsurance at Gallagher Re.

james-vickers-gallagher-reArtemis spoke with Vickers to understand some of the key renewal trends that emerged, of relevance to the ILS fund market.

The reinsurance broker executive told us that the January 1 2022 renewals were particularly interesting, as in some cases the senior management of reinsurers was far more active than in other years, reflecting the determination to construct more robust portfolios of risk.

This worked in the favour of protection buyers that could differentiate themselves, based on better performance and less severe loss experience.

It also drove home the fact that, while the reinsurance market is global, it does remain a series of smaller markets, each with distinct and smaller cycles, which is why rate differentiation has become so prevalent of late and blanket increases aren’t being seen, no matter how hard the reinsurance market is deemed to be.

On the subject of insurance-linked securities (ILS) funds and how they fared at the January 2022 renewals, Vickers explained that retrocession was the main area that was disrupted due to capital availability.

However, the scale of the loss of capital came as a surprise to some buyers and challenged reinsurers who struggled to secure sufficient capacity in every case.

“It wasn’t really a very big surprise that the amount of retro capacity was going to be reduced, particularly on an indemnity basis,” Vickers told us.

“But I think what caught some buyers by surprise was the extent of the reduction from the ILS funds quite late in the day.”

That proved challenging for some reinsurers that had been relying on a certain amount of retro capacity being made available to them.

“Most buyers were smart enough to know they were they were not going to be able to buy the same retro they’d had in 2021. It was going to cost more money and so they were already adjusting their thoughts about retro buying strategies and what they would retain net.

“But a number of them had hoped that the original pricing would begin to move up to a level where they were prepared to expose more of their own capital. And for a number of reinsurers, property cat rates moved but not enough to get them excited about exposing more of that capital,” Vickers explained.

That can make growth more challenging, as the incoming rates from writing treaty business are not compensating for the higher retro rates, or providing some reinsurers the confidence to expose more core capital, it seems.

This is precisely the kind of situation that could result in some strategic purchasing of instruments such as industry loss warranties (ILW’s), after the renewals, as reinsurance firms look to bolster out their protection and ensure they have their capital optimised for 2022.

More broadly, Vickers told us that there has been a split in the ILS market, with some ILS fund strategies far more challenged by recent catastrophe loss activity than others.

“In some areas, the ILS markets are very buoyant, it’s more that the investors are wiser to the individual strategies that the funds are taking,” Vickers said.

But added, “If you’re trying to raise money for a cat bond fund that has performed well, that’s probably quite easy. What’s difficult is if you’re trying to raise money for fund where you’re writing indemnity aggregate cover.

“That isn’t straightforward, because any investor will look at the performance of that product over the last five years and just say: ‘I don’t want to do this, but I’ll put my money in one of your other funds.’”

Read all of our reinsurance renewals news coverage here.

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