ILS issuance to “materially increase” in coming months: Jean-Louis Monnier, Swiss Re

Insurance-linked securities (ILS) and catastrophe bond issuance is likely to “materially increase” over the next nine months, according to Jean-Louis Monnier, Head of Retro & ILS Structuring and Origination at global reinsurance firm Swiss Re.

Monnier expects that with the ILS market being relatively stable following two years of catastrophe losses, albeit with investors still digesting their impact, the market is set to return to growth in the coming months.

“We expect issuance to materially increase over the next 9 months in the face of renewed capital raising and high cat bond redemptions,” he said to us during a recent interview.

But ILS investors are likely to move forwards with a much greater understanding of the risks associated with backing insurance and reinsurance contracts, after the experience of the last two years, the resulting losses and loss creep.

Monnier explained, “Based on historical analysis, one would expect loss development for 2017 and 2018 US wind events to be largely behind us. We believe investors will factor in such development uncertainty in the future, making a qualitative and quantitative assessment of the typical loss development for a given peril, the general claims process in the affected market and a ceding insurer’s approach to reserving.”

The experience may also lead to ILS funds adjusting their approach to reserving as well, he continued, saying, “They may also be more conservative in the way they side-pocket potentially exposed bonds to ensure liquidity in their funds.”

The loss experience has resulted in investors doubling-down on their core catastrophe exposures and so in some cases slowed the expected expansion of ILS into new lines, but this is expected to return.

“In 2019, some investors became more prudent and essentially focused on core nat cat exposures in order to avoid a surprise loss from new risks or harder to model perils affecting performance. We expect appetite for new perils to return in 2020,” according to Monnier.

On the subject of trapped collateral, Monnier believes the catastrophe bond structure performed as expected, while it was more of an issue for reinsurance related ILS contracts.

He explained, “Trapped collateral is an issue for both cedants and investors. There is no question that, following an event, collateral needs to be adequately trapped to allow for loss development and due payment under the contract. The problem arises during the extension period and the multi-year nature of cat bonds means that it was less of an issue in ILS compared than versus Collateralised Re. Cat Bond standard extension thresholds have, by and large, performed as expected.”

Looking ahead, Monnier is bullish on the prospects for cat bond and ILS issuance.

“We are optimistic on the ILS market for 2020 and beyond, provided no significant events will happen,” adding “We see a very healthy pipeline in the year ahead.”

He continued to explain, “We see growth in underlying insurance exposures and a potential reduction in protection gap leading to an increase in demand for capacity.

“Higher pricing should also start attracting new capital. We see a continued flight to quality as investors become more sophisticated and put greater focus on the qualitative aspects of a cedant’s portfolio and ability to handle claims. This will lead to more differentiated terms for both cat bond and sidecar sponsors with top cedants benefitting most from their established franchise.”