Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

ILS funds increasingly differentiate cedants: Willis Re


At the recent mid-year reinsurance renewals, insurance-linked securities (ILS) funds were seen to have become increasingly discerning, as they adopted a more differentiated approach to how they underwrote their portfolios.

Differentiation between reinsurance cedantsThis follows the trend seen among traditional reinsurance markets, as broker Willis Re explained, “Almost all buyers were able to secure the capacity they desired at June 1 and July 1, but differentiation between cedants by reinsurers has increased, particularly based on the accuracy of their previous catastrophe loss estimates. Superior pricing and capacity were available to clients seen as preferred trading partners.”

Of course, this isn’t just about being more disciplined and discerning, it’s also about the reinsurance market cycle itself, which has changed to become more localised and cedant specific in recent years.

Gone are the days when broad-brush rate hikes could be enforced across a market at renewal time.

Instead, we see rate increases now enforced based on loss experience, long-term performance, accuracy of prior event loss estimates, and willingness to work as partners, meaning capacity providers are all differentiating pricing and terms between counterparties much more these days.

Willis Re explained that the ‘market-standard’ price hikes of the past have now been, “displaced by reinsurers’ more discerning approach, creating a wide pricing disparity between different accounts.”

This goes for ILS funds too, as well as other collateralized reinsurance underwriters, who increasingly differentiate in the same way.

It’s not just across the property catastrophe world either, the practice of rewarding the higher performing cedants extends into other classes of business as well.

“The same dynamic of superior pricing for the better performing companies was seen in casualty lines too,” broker Willis Re said.

With this differentiation spreading across the market, it’s no surprise ILS funds and collateralized players have followed suit, as this is not a topic based on sides of the market, or sources of capital, rather it is a new more effective way of pricing and a recognition that performance matters in partners (and should be rewarded accordingly).

In Florida’s reinsurance renewals the differentiation was evident in buyers quotes and authorisations as well, resulting in a multi-tiered renewal with different layers of rate increases applied, dependent on performance and loss creep related factors.

Of course, new views of risk that are emerging will also have played a role here, as markets absorb the effects of hurricane Irma’s loss creep and now the new assignment of benefits (AOB) reform legislation.

Specifically on ILS funds and investors, Willis Re found that the tendency to differentiate was strong.

ILS players, “Differentiated strongly among cedants and reinsurance structures rewarding higher quality placements with better pricing, terms, and conditions relative to what the raw modeling output would otherwise suggest,” the broker said.

Of course, differentiation has actually been a feature of renewals for ILS funds managers for some time now.

Increasingly ILS funds have differentiated their terms and conditions, seeing them as important as rate in deriving an appropriate risk-adjusted return from any transaction or reinsurance contract that they underwrite.

This year the differentiation has become so much more apparent as the market has so much more performance data on cedants to use in identifying the best firms to back and who should pay more for their capacity.

James Kent, Global CEO of Willis Re, commented, “Overall it remains a functional and logical reinsurance market with preferred pricing and capacity for cedants viewed as superior partners.

“The logical differentiation in the response and approach from most reinsurers appears not only rational but indicates that reinsurance capacity remains somewhat discerning; on that basis, we remain confident that the market continues to function in an appropriate fashion.”

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