As the market moves towards the January 1st renewals season and into 2020, the insurance-linked securities (ILS) space needs to learn and educate on the reserving process and go through a phase of rebuilding, according to industry experts.
This was the message from ILS and reinsurance industry executives at the 2019 Artemis Monte Carlo Executive Roundtable. Participants debated an array of burning industry topics, including what needs to happen as the sector moves towards the key January renewals.
“There needs to be a phase of rebuilding confidence,” said Jutta Kath, Head of Transaction Management, Schroder Secquaero.
Other panellists agreed, adding that the last several quarters offered a real test of the structural features prevalent in the asset class, which, for an ILS sponsor, should instil a level of confidence.
“For the first 20 years of ILS there were only seven tranches of notes that were impacted or impaired from nat cats, excluding Lehman Brothers and excluding some other items.
“But through 2017-2018, we saw 25 or so bonds that are being placed as being impaired, so it’s been a period that has highlighted the mechanism of ILS as well as investor resolve,” explained Rhodri Lane, Managing Director, Head of International Capital Markets, Aon Securities.
In the aftermath of consecutive heavy loss years for re/insurers and ILS players, the retro market became challenging and according to Richard Boyd, Head of Capital Solutions at Allianz Global Corporate & Specialty, there has been a heavy over reliance on cheap retro that is not going to come back anytime soon.
“And, everyone has learned that while that was great for an opportunistic trade, when it goes away it makes your life very hard, so as long as people remember that then they will need to maintain that underwriting discipline,” he said.
Fears of insufficient retro availability at 1/1 2020 were discussed recently by reinsurance broker Willis Re’s Graeme Moore, who said that capacity will be “tight but sufficient” for the upcoming renewals season.
Another point raised by roundtable participants was the fact investors will be looking for an attractive level of risk-adjusted return, and while some said that there is likely to be a swing back in the pendulum from high frequency transactions to more occurrence-based deals, clients are there and it’s apparent that they want to continue to access the space.
Luca Albertini, Chief Executive Officer (CEO) of Leadenhall Capital Partners, added, “Clearly, the more premium the more investors feel happy with. Rates would help, yes, but learning through the reserving process and teaching through the reserving process as well.
“What it seems to me happened is that a lot of investors came into the space looking at what happened in the past, but it seems that not many looked at how we got there. Some people didn’t focus on how we got to the final number and people didn’t focus on the fact there was a Cat 5 that didn’t hit, and then we have the events.
“So, it’s actually a useful process to experience the development of claims while invested because actually it’s more information and more education that makes us stronger in the end. Seeing how we get there and seeing how we can improve in the reserving area are important factors.”
Looking at the Jan 1st renewals and Clark Hontz, President of Beach & Associates (Bermuda), argued that reinsurance buyers would be more comfortable with moderate pricing corrections year-on-year that are sustainable over a longer period of time with premiums reflecting risk as they change over time.
“That was the promise made years ago from the capital markets; when a big event or series of events happen there is going to be significant sources of capital coming in after that event or events, reducing the potential for volatile cycles, and I think we are not quite there yet. But with more sustainable pricing over the long-run we would be, I think,” said Hontz.
David Govrin, President of Third Point Re USA, ended the day’s discussion with a call to the industry to talk about and find the best ways to match risk to capital.
“It is not educating one market or another market, it’s just finding the right clearing price for risk from wherever it comes from and in the end, it will come from whoever has the most efficient cost of capital and delivered via the most efficient operating models.
“There is no alternative capital, it is just capital and risk,” said Govrin.
Download your copy of the Artemis Monte Carlo Reinsurance Rendezvous Executive Roundtable 2019.