Insurance-linked securities (ILS) investors need to be active with capital deployed in the ILS market both pre and post-event, so they can support cedants capacity needs and capitalise on potential opportunities, according to Dr. Robert Herde of Munich Re.
Typically, after a large loss event, insurance, reinsurance, and ILS markets reorganise and adjust to a certain degree, usually resulting in a rise in rates and an inflow of new investors, and the exit of others.
However, owing to the global re/insurance landscape maintaining a supply/demand imbalance that is driven by an influx of capacity from both traditional and alternative sources, a post-event market has the potential to look very different from years gone by.
“We don’t necessary believe that post-event scenario will look like many people still believe, like after Katrina. We believe it will look completely different. But we need this capacity that teams up with us post-event,” said Dr. Robert Herde, , Executive Director, ILS Distribution at reinsurance giant Munich Re’s Capital Markets division, speaking at the ILS & Cat Bond London 2016 event held in early March.
It’s a valid point. Numerous ILS and reinsurance market analysts and experts have noted a likely flattening of the underwriting cycle in future years, driven by the markets overcapacity issue that has been exacerbated by the continued benign loss environment and competitive operating landscape.
This suggests that when the next large event happens, which it undoubtedly will, the rate increases that ILS investors are perhaps more accustomed to are likely to be lower.
As the ILS market began to increase its share of the overall reinsurance market pie, making a meaningful transition to a more mature, sophisticated and sizeable asset class, many ILS sector analysts have commented on the glut of capacity sat on the side-lines, waiting to enter the sector post-event.
But in order to take advantage of any rate increases that do occur post-event, however reduced they are compared to previous post-event scenarios, Herde underlines the importance of investors being active pre-event also and not just sitting on the side-lines expecting to be able to get into the market.
“We also want investors in this market pre and post-event, not either or, which is currently the target of some investors, to either only be there post-event, or to be there small pre-event, and large post-event,” explained Herde.
If investors are serious about ILS as a viable, diversifying asset class within their overall investment portfolio, it’s a benefit to be in the space pre-event, regardless of the currently lower yields on offer – although we would hasten to add that while compressed the ILS market is still returning positively in most cases, even at times of re/insurance market turmoil and outclasses many other asset classes, while offering low-correlation and volatility.
Being in the space pre-event helps to build relationships with primary players and traditional reinsurers that will become ever more important to securing business and accessing risks when the next large industry loss event does actually happen.
Furthermore, being in the space pre-event ensures that those ILS investors are ready, and importantly willing to deploy capital to those in need following a loss event, further strengthening the perception of the asset class’ permanence, willingness, and ability to support the market post-event, in terms of capacity, skill set, and knowledge.
It’s also possible that if more investors have a presence in the ILS market before a disaster occurs, then it could mean more capital flows in to support the industry post-event, as more will be ready, willing, and able.
Essentially, Herde is underlining the importance of being active in the ILS space now, before the next catastrophe takes place in order to benefit from post-event market conditions, as it might be too late to have any meaningful influence on the market and capitalise on opportunities when others have been more proactive and innovative.