ILS & third-party capital are disciplined participants: AXIS CEO Benchimol

Insurance-linked securities (ILS) investors and third-party capital providers are “disciplined participants” in the global insurance and reinsurance market, according to AXIS Capital CEO Albert Benchimol.

There is no doubt that the ILS market and third-party sources of reinsurance capital have been “stressed” by the catastrophe losses of the last few years, Benchimol explained during a recent AXIS Capital conference call.

“Trapped capital and redemptions from dissatisfied investors,” are two of the things that have subsequently amplified the stress of the initial catastrophe loss impacts, he said.

But this has also helped to focus the minds of reinsurers on rates, resulting in supportive upwards pressure.

Benchimol said that the reaction of the capital markets has “contributed to some of the corrections” on rates at renewals, as it, “Caused reinsurers to think more critically about their retro strategies and the risk-adjusted returns of their business.”

“I think this was a good development, as this industry for too long acted as if third-party capital was unlimited, cheap and unconcerned with losses,” he continued.

Further explaining that, “The developments this year are an indication that ILS and third-party capital will be a disciplined participant in our industry, prepared to put large sums of money to work but also requiring adequate risk-adjusted returns. That’s a good thing for our industry and for AXIS.”

AXIS Capital now has roughly $2.1 billion of third-party capital under management in total, with over $1 billion in ILS and sidecar like collateralized reinsurance strategies.

That’s driving increasing benefits to the re/insurer, as it leverages the third-party capital alongside its own to expand into catastrophe risk underwriting while managing its PML’s and earning an increasing amount of fee income as well.

The firms total strategic capital partner fee income reached almost $19.2 million for the second-quarter of 2019, up from just under $11.4 million in the prior year.

Benchimol commented, “I’m proud that AXIS is one of the very small number of companies that successfully raised more money this year and from a broader array of investors.”

Importantly, he sees this as additive to the overall AXIS business.

“That has allowed us to write more gross premium on their behalf and generate attractive fees in the process,” Benchimol said. “Our fees from strategic partnerships were up 59% in the first-half of this year, to $39 million.

“This is great progress and we’re well on our way to making fee business an important and attractive part of our revenue and profit streams.”

Of course, it is equally important that the insurance and reinsurance firms wielding alternative capital from investors are disciplined as well. While they also need to be transparent and able to explain any conflicts of interest clearly, or their access to this capital could become more challenged over time.