There is a a likelihood that the renewals of Japanese reinsurance programs at April 1st 2020 continue to see the insurance-linked securities (ILS) market playing a relatively minor role, with share increases harder to come by, but at Florida’s reinsurance renewals at June 1st there could be a chance for ILS players to expand their appetites once again.
The ILS market plays a substantially different role depending on which market you look at.
In Florida and the United States, catastrophe reinsurance programs almost all have some level of direct capital market or third-party capital participation.
Global retrocession, equally, is the home of ILS funds and collateralised reinsurance, as well as fronted capital markets capacity.
But turn to Japan, Australasia, Asia in general, Africa, even Europe and Latin America, and the level of ILS market participation in reinsurance programs shrinks considerably.
This is partly down to the level of underwriting returns, the long-term relationships remain so important in some regions of the world, as well as the competitive nature of large, globally diversified reinsurers that can underwrite at rates at or even below expected loss, thanks to their ability to discount for diversifications sake.
Hence, hearing that at the Japanese renewal the participation of the ILS market may remain relatively minor, is not really a surprise at all.
As we explained last week, the April reinsurance renewals of Japanese programs are expected to see some very significant price increases, to loss affected and largely wind exposed accounts.
Rate rises of up to 50% are forecast, with more widely 10% to 25% increases hoped for by the reinsurance market and also ILS funds.
Which presents a chance for some market growth, where ILS players can exert the efficiency of their capital. But overall, in the Japanese renewal market, it is still likely to be the largest traditional reinsurers that set the majority of pricing.
Speaking at a recent conference in New York, Aditya Dutt, President, Renaissance Underwriting Managers at Bermudian RenaissanceRe, participated in a conversation that concluded ILS markets can be expected to maintain their shorter-tailed catastrophe risk focus, in the main, making growth something that may be easiest found in the market’s where ILS funds already have the most share.
Dutt said that, based on current market dynamics and even given pricing expectations, he believes that ILS funds will remain more minor players at the Japanese reinsurance renewals.
Primary Japanese insurance carriers are likely to continue focusing on their long-standing relationships with large, traditional reinsurers, letting traditional reinsurance pricing set the rates for them.
Broking sources have suggested to us there has been some increased interest in adding greater diversification to reinsurance programs among Japanese carriers this year, especially given the concentration of losses with smaller, traditional players, such as some Lloyd’s syndicates, in recent years.
That would be extremely welcome for ILS funds, as they are keen to deploy more capacity into Japanese reinsurance programs, at different levels of risk and return to the more typical opportunities they see.
How extensive any new interest in ILS capacity really is among Japanese insurers remains to be seen, their programs are very closely held by the major brokers and there is a clear desire to control the carrier-reinsurer relationship as well.
Of course, not every ILS fund or investor is looking for all that much diversification anyway, as many already have very large and diversified asset bases, so allocating to concentrated catastrophe exposures can be seen as preferable for some large, institutional investors.
However, analysts recently noted that Japanese players are forming long-term relationships with the leading ILS funds and for those that sponsor catastrophe bonds there is already a good deal of familiarity and relationship in place.
But still, absolute pricing in Japan remains relatively low for ILS funds to absorb, given they don’t have the luxury of very large, multi-line and regionally diverse reinsurance portfolios.
The April 2020 renewal is expected to be a good test of the durability of ILS fund relationships for the Japanese carriers and those ILS funds demonstrating their staying power here may well be rewarded.
Persistence is expected to result in growing shares though, albeit not as rapidly as ILS funds would in some cases like to see.
For these players and other ILS funds looking for opportunities to grow, their may be better news come June 1st.
Dutt, of RenaissanceRe, explained that the June renewals of Florida reinsurance programs could see a growth opportunity for ILS funds and capital providers, as traditional reinsurers may tread carefully there after the recent loss years and loss creep that emerged.
It’s useful here to look back a few years and consider the fact that many of the largest reinsurers in the world have been growing their Florida and U.S. property reinsurance books for a few years now.
As a result they have all largely upsized on their concentration exposure to the Sunshine State, which may account for a somewhat more tempered interest in 2020, despite the expectation of much better rates being available.
Dutt said that he expects the ILS market will play a significant capacity role in Florida this year.
Reinsurers continue to hesitate because of the structural issues that the Florida insurance market has faced, Dutt said, also explaining that the loss creep does concern reinsurers enough to make them more measured in their appetites for Florida risks.
Major reinsurers and smaller traditional players such as Lloyd’s syndicates, may be even more averse to loss creep than ILS funds, in some cases.
Some of these players have longer-tailed books, where they expect to be paying and managing claims over the longer-term horizon. But their catastrophe book was expected to be a predictable driver of reserve releases, over that same long-term, something that has been a little upset by the likes of hurricane Irma and its loss creep.
Again, whether that’s sufficient to really temper their appetite remains to be seen.
We also hear that some Florida carriers are looking less favourably on smaller capacity providers in the Lloyd’s market this year, as they see this as an impaired segment of the market and perhaps no longer delivering the relationships on capacity that this catastrophe exposed state requires.
More interesting dynamics emerging it seems and these upcoming renewals promise to be fascinating to observe.
Of course, the upshot is most likely to be that the renewals experience will be uneven, across both sides.
With some ILS funds and collateralised players likely to gain share, even in Japan, while some traditional players will likely exert their strength of capacity and balance-sheets, even at the 6/1 renewals, as well.