Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Investor interest in ILS is higher now than ever before: John Seo


Contrary to the long-held belief (in some circles) that ILS investors would flee from the market following any major catastrophe losses, the response so far has been extremely positive and at this point in time the interest being shown by investors is perhaps at an all-time high.

John Seo, Co-founder and MD at Fermat Capital, explained in a recent interview, “For better or worse, after a significant loss event many current and potential ILS investors are conditioned to put additional or first-time capital into ILS. As a result, investor interest in ILS is higher now than ever before.

“No doubt, this is due, in part, to an expectation that some reinsurers and insurers will firm up premiums for some programs in 2018 and that this might have a spill-over effect on the ILS market and I expect ILS to continue to play a role in moderating post-event rate increases.”

A very substantial piece of evidence to this effect was providing recently, when retrocessional reinsurance specialist investment manager Markel CATCo announced that it has raised more than $1.8 billion from existing and new investors to ensure it can meet cedent demand at the January renewals. The manager is also seeking to raise more from its listed retro fund strategy.

That’s one of the largest individual capital raises every seen in the ILS market, we believe, demonstrating the appetite of the investor-base to maintain and even grow its allocations to reinsurance and catastrophe risks.

In our discussions with large institutional investors over recent weeks we have heard from; organisations that are invested in insurance-linked securities (ILS) already and would like to allocate more to the sector, organisations that used to be invested and are now considering returning to the sector, and even large investors that have been watching the ILS market develop and believe now is the time to enter with their first allocations to reinsurance.

Of the latter group, those large institutions such as pension funds that have been watching ILS market development closely, they seem to fall into two groupings.

First, those investors that felt ILS and reinsurance returns were too low and now believe there is an opportunity to benefit from any rate rises that may occur in the wake of recent catastrophes Harvey, Irma and Maria. These could be less sticky investors, we would guess, as if rates soften again next year due to a fresh build-up of excess capital they may not be the type to stick around.

More promising over the long-term are the large institutions that have been watching ILS, considering an allocation, but now feel that they have seen the sector tested, and who like the response to losses they are seeing from investment managers, as well as the fact that the opportunity shows no sign of going away or diminishing.

Seo said in the interview that, “Loss events such as we’ve just experienced are a siren call for ILS capital.”

We’re now seeing the beginnings of the effect of this siren call, with investors actively looking for deployment opportunities, ILS funds looking to service them, some ILS managers already raising new capital, and now a number of traditional reinsurance firms also exploring the feasibility of raising more third-party capital as well.

We’re aware that a number of reinsurers are looking to assess the potential for higher rates at the 1st January reinsurance renewals and if it looks as if the opportunity is there, they will seek to raise more third-party capital to deploy alongside their own capacity.

That will allow those reinsurers to manage their PML’s, while earning fee income and helping investors access the reinsurance linked returns they seek.

Investors we speak to are largely aware that the higher rate opportunity may not be sustained for that many renewals, but they see this as the right time to enter the market or upsize their allocations, hoping for an opportunity to secure higher returns at least for one round of renewal contracts.

Join us in New York in February 2018 for our next ILS conference

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