ILS market going deeper, but needs to price for trapped collateral: Experts

Panellists at the annual Munich Re insurance-linked securities (ILS) roundtable event in Monte Carlo today said that the ILS market is ready and able to go deeper into reinsurance.

It’s not just that a readiness is seen though, it’s also seen as a necessary requirement for the ILS market to deliver on its promise and to source sufficient opportunities for the interested investor base as well.

Speaking at the ILS Roundtable event hosted by global reinsurer Munich Re at the 2019 Monte Carlo Rendez-vous this morning, experts from the sector said that it’s already being seen that the rise of collateralised reinsurance has resulted in ILS funds playing deeper in the reinsurance tower.

Caleb Wong, Senior Portfolio Manager focused on ILS and catastrophe bonds at asset management giant Invesco, explained that ILS has now been seen to “pull through a more traditional market cycle” following recent catastrophe loss activity.

He said that ILS is now “getting more involved in traditional layers” of reinsurance programs, no longer simply backing the very peak of exposures as the cat bond market had at first done.

“ILS is now involved in deeper layers,” Wong continued, adding that this is expected to continue now that “third-party capital has learned about going through a full loss cycle.”

The deeper approach of ILS has also resulted in ILS becoming increasingly exposed to elements such as the loss creep that has been seen, but Wong said the way this has been managed “shows differentiation in markets.”

Also speaking on the panel, Quentin Perrot, Senior Vice President at Willis Towers Watson Securities, explained that the loss experience has now resulted in a market that is “thinking about structures and how they can be improved.”

He further explained that there has been a realisation that “some investors may not have priced for trapped collateral in the past.”

Resulting in, “investors asking for structural changes” especially in some sidecars and quota shares, “as well as a way to better mark structures.”

Marco Sordoni, Chief Executive Officer of UnipolRe and the Head of Reinsurance, UnipolSai, a regular sponsor of catastrophe bonds, concurred saying, “More and more the ILS sector is going deeper into the understanding of what reinsurance is.”

He explained that ILS used to be top-layer in the main, but by going deeper into lower layers of reinsurance ILS is getting more exposed to the market.

Sordoni also said that behind this there is a need for claims management, data quality and also advice transmission, as well as a continued lack of stochastic models for certain perils, that many ILS investors still need to see for comfort in the risk.

Thomas Blunck, a board member at Munich Re overseeing its Capital Partners and other units, said that he has seen, “ILS going through a similar process to us reinsurers,” when it came to understanding and dealing with losses.

Commenting on where in the market ILS capital should play, Blunck said, “ILS will find its sweet spot” adding that the shifting around of investor allocations is evidence of a flight to quality (as well as a hunt for the right level and type of risk).

Caleb Wong of Invesco commented that investors will begin to demand a higher return for the risk they face due to the ILS structure as they drop increasingly deeply into reinsurance towers.

On rate expectation, Wong said, “Investors will need a higher return to account for trapped capital.”

Maren Josefs, Associate Director, Insurance at S&P Global Ratings, also participating in the panel, noted that perhaps the flight to quality would be better termed a “flight to alignment.”

Which is perhaps a better way to say it, as alignment has become such a hot topic.

The panel also discussed the fact investors needs are being listened to more when it comes to structures and terms, something that perhaps was a little forgotten after the 2017 losses when ceding companies and brokers tried to tighten up terms on collateral and other features.

Now, the tide has turned though, perhaps assisted by the realisation that this capital is here to stay and investors concerns on collateral are being listened to increasingly, according to the panels comments.

As ILS moves increasingly deeply into reinsurance towers the collateral issue will remain key. It’s encouraging to here from these experts that some of the investor concerns around this appear to be increasingly listened to.