Capital markets reinsurance players, so insurance-linked securities (ILS) fund managers and investors, maintained an “aggressive posture” on price at the recent April renewals, according to broker Willis Re, as ILS capacity continues to demonstrate its cost-efficiency.
“Capital markets are now often prepared to price more competitively for peak zone catastrophe risk and there is currently a differentiation in the pricing of catastrophe bonds compared to traditional markets,” Johan Cavanagh, the Global CEO of Willis Re explained this morning.
This trend has been well-documented throughout the last two quarters, as it became evident that catastrophe bond pricing had declined to new levels of competitiveness with traditional reinsurance.
We’ve said numerous times that this would likely play out at the upcoming renewals in an opportunity for ILS fund markets to gain new market share, by wielding this new price competitiveness in collateralised reinsurance renewals. Willis Re’s commentary releases in its latest reinsurance renewals report confirms this to have been the case.
ILS investors have been “competing strongly for business” according to the broker. This has involved ILS fund markets “offering increased capacity at terms that are discounted over last year.”
These newly found price marks are enabling ILS funds to take increasing shares of some traditional reinsurance programs, while at the same time catastrophe bond sponsors are being encouraged back to the market due to the very attractive pricing that can be achieved there.
The upshot is an opportunity to secure more market share and we expect that the ILS market will have an opportunity to grow in size over the coming months, with the June and July renewals now offering a real opportunity to meaningfully upsize participation in the key U.S. property catastrophe reinsurance market.
Traditional reinsurance pricing for short-tail lines has continued to decline at the April renewal, with rates ranging from flat to down mid-single digits, according to Willis Re.
Willis Re notes that maturing catastrophe bonds are largely being replaced by new issues, enabling ILS investors to “continue to grow assets and market share.”
Cat bond spreads have continued to decline as “many investors have become keen for increased liquidity” Willis notes.
This is no surprise, as ILS funds and investors have increasingly invested in illiquid assets, such as collateralised reinsurance. The need for portfolios to maintain a level of liquidity is clear, and catastrophe bonds offer that benefit, so after a few years of strong growth of collateralised reinsurance it seems sensible for cat bonds to receive new focus in 2017.
The reduction in cat bond spreads has been responded to by sponsors as well, with new issuance, new sponsors, renewals of maturing bonds all helping to soak up some of the newly found ILS investor demand.
The result of this new-found ILS price-competitiveness and the increased demand from investors to access catastrophe insurance risks, is more pressure on traditional reinsurers of course.
“This erosion in the margin on catastrophe business puts additional stress on traditional reinsurers writing more diversified portfolios, since they have been relying on higher margin catastrophe business to balance their overall portfolios,” Cavanagh explained.
As catastrophe lines continue to decline in price, with ILS funds beginning to pick up more business as traditional players back-off, the temptation for reinsurers will be to try to push rates northwards to enable them to continue to underwrite there.
Cavanagh continued; “With results on many diversifying non-catastrophe classes now marginal, there is greater pressure on reinsurers to address the pricing in these classes.”
Addressing the pricing in these classes of business may be difficult now, with ILS markets becoming the defacto most efficient provider of coverage at some levels of the world’s catastrophe reinsurance programs.
Is it aggressive posturing, as the broker suggests? Or just a new-found realisation of the lower-cost of capital that ILS strategies are able to wield, perhaps especially so as the scale and diversity of ILS portfolios continue to grow?
Are we nearing a tipping point where some markets become ILS dominated? It’s certainly possible that traditional players may have to pull-back more at the mid-year renewals and it will be fascinating to see how much market share ILS can take in markets such as Florida this year.