The growth of the ILS market has been leveling out in 2016 with slower, more incremental increase in capital seen, which is a reflection of a healthy market that manages its capital inflows and seeks to match them to deployment opportunities, according to ILS experts.
Speaking at the ILS Roundtable event hosted by reinsurer Munich Re at the 2016 Monte Carlo Rendez-vous this morning, participants discussed the fact that alternative capital growth has slowed and that catastrophe bond issuance has not lived up to recent years, so far in 2016.
It’s important to remember that the ILS market has been growing, Aon said by 10% in the last year to hit $75.1 billion, while at the same time the cat bond market has seen around $4.2 billion to date in 2016, according to Artemis records.
That’s not bad by any means, however ILS growth has certainly been stifled a little by market competition, the low reinsurance rate environment and also a recognition that there is only so many deployment opportunities in a reinsurance market that has not been growing particularly quickly.
Meanwhile cat bonds themselves go through their own cycle, of renewals and demand, especially as deals are multi-year and changing demand from ceding companies that have overhauled their reinsurance programs in recent years.
Cory Anger, who heads up global ILS structuring at GC Securities, explained that the ILS market may be thought to have reached a period of stagnation in 2016.
“The use of alternative capital is at an all time high, but in 2016 we’ve seen more stagnation,” Anger explained.
This has happened across the set of ILS products, not just in cat bonds but also in collateralised reinsurance, Anger continued.
“I’m not seeing as much incremental growth,” she said, “probably on the traditional side there also not seeing a tremendous amount of incremental growth.”
“I think it’s disproportionately affecting the alternative capital space, because investors basically signalled in December 2014 that they’re not willing to take pricing down substantially more,” Anger explained.
She went on to say that this is because the trajectory of pricing declines was so steep over a number of years, with ILS pricing coming down “much faster and more aggressively than the traditional market” that investors rapidly approached a point where they felt the lower end of the pricing cycle was near.
Now the traditional market has generally caught up on pricing and in 2016 Anger feels we could be set for a new period of price adjustment, as investors and ILS managers have now got more capital ready and on tap.
“I think we could be testing some price floors,” Anger said, but stressed that she expects this to be in a more measured way, as investors will not want to erode margin in the pricing too much further.
However this could result in a new competitive burst, between ILS and traditional companies, which with reinsurance nearing break-even and profitability low could produce an interesting dynamic.
Michael Stahel, Partner at LGT ILS Partners Ltd. the insurance and reinsurance linked investment specialist unit of private banking group LGT, explained that investment managers have to compete with all other alternative asset classes when they are talking to their investors.
Part of this is the communication of lower expected returns in ILS to investors, which takes time as well, but he admitted that some investors are now seeing more opportunities in other asset classes at times.
“ILS has started to level out,” Stahel commented, “We have seen some clients saying that there are other areas that are equally or perhaps even more attractive than ILS.”
“Does this concern me, should it concern you?” he asked the audience, “Well I guess that’s very healthy, that’s exactly what you would want to see from a healthy market.”
“Rates have gone to a level where some clients say, well actually I can make more money in another space, but this is not a bad signal.”
He went on saying that “This money will come back as soon as there is more demand for reinsurance capacity. The money will come back almost instantly.
“Much, much more. The flow will be much bigger and the move can be much quicker than you have seen a couple of years ago.”
The panelists discussed the need for innovation in both traditional reinsurance or risk transfer, as well as in the ILS market, with product innovation likely to stimulate much greater flows of alternative capital in the future.
On catastrophe bonds specifically, Stahel later said that while LGT’s pure cat bond funds have been soft closed for more than a year, as deployment opportunities have not allowed the manager to take regular inflows, “We could raise a lot of money for cat bonds” if the opportunities were available.
He urged ceding companies to consider issuing catastrophe bonds right through the levels of their reinsurance programs, not to fully replace traditional cover but in order to help them by gaining some price transparency around the different levels of risk they cede to the markets.
While LGT has been taking on money consistently for its more illiquid collateralised reinsurance style funds, Stahel also noted that timing of inflows is key in order to ensure they are matched with deployment opportunities.
So while the ILS market may have slowed its growth trajectory, the sentiment of the market is that this could be just a temporary slowdown in response to market conditions and that ultimately this is healthy and a further sign of discipline.
If product innovation can indeed be stimulated and accelerated, the growth could come back and it’s clear that some feel this could be as big as the wave of inflows we saw over recent years.