The global trend for growth of reinsurance and insurance-linked securities (ILS) is set to continue and intensify, as investors increasingly look to sit on both sides of the fence, leading experts to predict that new structures and new asset classes are on the ILS horizon.
This is according to industry executives and analyst at the recent ILS Bermuda Convergence Conference 2015, on a panel discussion titled, ‘Converging Capital Structures,’ where they debated what the ILS market might look like five years down the line.
All the panelists agreed that further convergence was likely, succinctly underlined by Director and Co-Head of Insurance Structured Finance at Goldman Sachs, Ali Al-Ali, whom said; “Five years down the road you do expect that there is going to be more global convergence, and the lines between a traditional reinsurer and a ILS asset managers going to blur, investors are going to sit behind both of those kind of vehicles, so you’re going to see more convergence.”
The continued blurring of the lines between a traditional reinsurer and alternative capital funds and ILS managers has been a well documented industry theme, ever since the growing pool of alternative reinsurance capital really started to influence the market.
And since ILS has only continued to grow its share of the overall reinsurance pie, it’s not surprising that the panellists’ expect this trend to continue.
Although the panelists agreed that further convergence was expected, Robert DeRose, Vice President, Property Casualty Reinsurance at A.M. Best, highlighted that the speed of convergence is “really going to depend on market conditions and how that evolves over the next few years.”
A view somewhat shared by Al-Ali, who noted that while he expects to see more ILS structures and also feels it will expand into new asset classes, market conditions, most notably whether there is a large loss event or not, will influence the amount of additional ILS capital coming into the market, and therefore have some impact on the pace of convergence moving forward.
“I think you’ll see different types of structures to try to deliver the risk to investors in different shapes, and also obviously try to bring more risk to the market, more on the primary side as opposed to the reinsurance side. You’ll see things like that,” said Al-Ali.
The entry of ILS into business lines outside of property catastrophe reinsurance, which is highly competitive in part due to the influx of alternative reinsurance capital but also the benign loss environment, is another hot ILS-related topic, and one addressed by the panel.
Al-Ali explained that there are cat bond investors currently that invest with asset managers that actually target business outside of property cat, but that for this to be successful it has to be the right structure for the right type of risk.
“But I think in terms of investor interest, there is that interest in going beyond just property cat,” said Al-Ali.
An important factor for ILS to successfully enter new business lines in a meaningful way clearly sits with the ability to adequately and accurately asses and price the risk, which of course can be helped with modelling and technology.
However, in certain business lines, owing to inherent complexities, a lack of historical data and other hindrances, modelling capabilities are insufficient and therefore knowledge of the exposure is inadequate.
“You need to make sure that people understand the risk and you need to make sure people understand that not every risk is appropriate,” said Al-Ali, a point echoed and expanded on by panelist Neil McConachie, Chief Financial Officer (CFO) at Fidelis.
He said; “Yes I think there will be a broader range of classes offered by people, but I’m yet to be convinced that the customer is being looked after as well as they could be if someone is underwriting something they don’t know about.”
Another possibility moving forward for the ILS space is consolidation among the ILS fund managers community, said Greg Hagood, Co-Founder of Nephila Capital.
Hagood advised that following Markel’s acquisition of CATCo earlier this year, “there’s a lot of big funds out there, reinsures are trying to start something, sometimes it’s more challenging than they think, and maybe they buy someone, that wouldn’t surprise me.”
More convergence signals more structures and the continued yet accelerated entry of ILS into new asset classes, dependent on market conditions and the loss environment, is the message from panelists.
But in order for this to be successful ILS market participants will need to innovate, and also be seen to show sophistication and discipline with underwriting and their overall investment approach.
The lines between traditional and non-traditional reinsurance is certainly greying further, and it will be interesting to see how the convergence market reacts to the continued reshaping of the re/insurance landscape over the next five years and beyond.