Investor demand for insurance-linked securities far exceeds supply: A.M. Best

Currently, the market is facing huge demand for insurance and reinsurance-linked investments from potential investors, according to comments made by Stefan Holzberger, Managing Director of Analytics for A.M. Best Europe, the European division of the rating agency. Demand from investors for insurance-linked securities is so high that it far outstrips demand, he believes.

The interest level shown by capital market institutional investors such as pension funds, hedge funds, private equity firms and specialist investors has been growing strongly through 2013, as the profile of the insurance-linked securities and catastrophe reinsurance asset class has risen.

We’re now at a stage where demand is exceeding supply and this has been a factor which has assisted with putting pressure on catastrophe reinsurance pricing and it has also been evident in markets such as the one for secondary catastrophe bonds, where demand has raised prices on many outstanding bonds.

Stefan Holzberger commented; “There is great demand in the market for cat bonds and industry loss warranties mostly originating from hedge funds, pension funds and private equity. The premise is that insurance-linked securities are not highly correlated to other asset classes and offer appealing returns as compared to other fixed income investments. Currently, demand for these investments far exceeds supply. This has brought the pricing down for natural catastrophe risks, especially in the U.S.”

The impact that all this capital has been having on traditional reinsurers is currently limited due to the narrow scope of the investments contained in this asset class.

“It should be noted that capital market interest in reinsurance is currently limited to cat risk,” added Holzberger. The expansion of the market into other classes of risk is perhaps not that far away, a number of specialist ILS investment managers have been working on efforts to bring other risks to the market. Holzberger noted; “Non-cat property and liability risks remain the domain of traditional reinsurers, at least for now.”

Holzberger cited alternative reinsurance capacity and third-party reinsurance capital as factors in the reinsurance industries strong capitalisation. Reinsurers currently have too much capital on their hands, which he called a “good problem” for them to have.

Given the response from some traditional reinsurers to the influx of capital from third-parties in recent months, we wonder how they might have reacted had this occurred at a time when the reinsurance market and reinsurers were not so well-capitalised?

The supply and demand imbalance will level out over time as the many new third-party capital funds and ventures get up to speed. Of course that will make the investment landscape more complex for those looking at the asset class, so it will become increasingly important for ILS investment managers, and third-party capital managers, to learn how best to market and promote their specific offerings and unique selling points.