The pricing of insurance-linked securities (ILS) and other collateralized reinsurance assets in the alternative capital space, is expected to remain adequate for the segments largest investors, superannuation funds, despite an expectation of further rate reductions to come.
Pension funds, sovereign wealth funds and endowments, collectively superannuation funds, are the largest and most stable source of institutional investor capital in the ILS and alternative reinsurance market today, according to Cory Anger, Global Head of ILS Origination and Structuring at GC Securities.
Today an increasing proportion of ILS capital and that invested directly into reinsurance premiums through other collateralized reinsurance vehicles comes from the world’s largest pension, sovereign wealth and endowment funds.
For these investors, who face a world of low to negative interest rate policy (NIRP), the ILS and reinsurance linked asset class provides a bright spot in an otherwise challenging investment market, offering diversification, low correlation and stable, relatively attractive returns.
And these returns remain adequate, according to Cory Anger of GC Securities.
“GC Securities’ review of target returns of superannuation funds reveals that the largest and most stable portion of alternative capital – pension funds, sovereign wealth funds and endowments – is still priced adequately despite significant premium rate reductions since 2012,” Anger commented.
With an expectation that prices could decline further over the coming months and into next year, there are always concerns that returns may drop below investors needs. But Anger believes that the return of the ILS market remains adequate and will continue to do so for the largest investors in the sector.
“Pricing is likely to remain adequate even with projected rate declines (subject to industry loss activity) for the remainder of 2016 and into 2017,” she explained.
ILS and catastrophe bond pricing has continued to decline this year, due to excess levels of risk capital in reinsurance and more sluggish demand for risk transfer limits, Guy Carpenter explained today.
“A deeper understanding of the supply/demand relationship for risk transfer limits requires a thorough analysis of the particular market taker’s cost of capital and premium rate level adequacy and cedents’ efforts to fully access and utilize the capital most efficiently,” explained David Priebe, Vice Chairman at the reinsurance broker.
Interestingly, while ILS may be able to lower prices further, the same may not be true of traditional reinsurance players.
“Alternative capital sources can accommodate further premium rate reductions and still maintain price adequacy,” Anger explained, “but traditional reinsurers may not be able to withstand rate declines with their already subpar equity returns.”
GC Securities estimates that at mid-August 2016 Bermuda reinsurance firms 2016 average return on equity is around 7.6%, down from 10% in 2015. At that level the traditional companies may not be able to sustain further price competition and ILS could gain the upper hand to take more market share.