Market cycle supports collateralised Re preference: Paul Schultz

Offsetting a recent decline in catastrophe bond issuance and maintaining ILS market development, collateralised reinsurance has recorded solid growth, a trend that is driven by the current market cycle, according to Paul Schultz, Chief Executive Officer (CEO) of Aon Securities.

In 2014 and into 2015 catastrophe bond issuance spiked and helped to increase the presence of insurance-linked securities (ILS) capacity in the global reinsurance market.

However, in more recent times the growth has slowed, and instead collateralised reinsurance placements have outpaced the issuance of cat bonds within the ILS space, which is in part to do with the current market cycle, says Schultz.

“I think to some degree clients accessing this collateralised capacity through collateralised re structures is a little bit easier. And so catastrophe bonds still have some friction associated with them in terms of the documents and the time to get prepared to launch.

“And in this market I think it’s just easier to vote for what’s simple. So I think in different market cycles we see one product that’s more preferred over the other, and I think in this market cycle it’s just simpler to execute on the collateralised reinsurance product,” explained Schultz, speaking to A.M. BestTV at the 2016 meeting of the reinsurance industry in Monte Carlo.

It’s an interesting point, and with efficiency becoming ever more relevant and necessary in the current, softening reinsurance market landscape, a simpler, easier to transact form of ILS appears to be of favour within the investor base.

The pot of alternative reinsurance capital continues to expand and investors clearly still view it as an attractive asset class. For the most part, catastrophe bonds and the broader ILS space is still focused on the peak perils, a trend that Jean-Louis Monnier, Global Head of ILS structuring at reinsurance giant Swiss Re, feels is “by virtue of reinsurance being quite competitive in the non-peak markets.”

“So it’s very hard for collateralised capacity to compete on rate on line below 2%, or on 2%,” said Monnier, speaking with A.M. BestTV, alongside Schultz.

Schultz echoed this point, stating that currently, cat bonds are difficult to compare to other types of reinsurance capacity, but stressed that the collateralised re market continues to show solid growth.

Adding to the reason for growth of the collateralised re market over cat bonds, Monnier said: “It’s a question of sourcing risk. Money is still coming to the market; so on a relative basis compared to other asset classes ILS is attractive. So the money is there and you need to source the risk where it comes from.

“So we are seeing investors sourcing the risk via collateralised capacity, we are also seeing some of the larger ILS funds actually accessing the risk directly, via insurance fronting companies. So I think that’s the main driver,” said Monnier.

The latter point raised by Monnier can be seen with Nephila Capital, the world’s largest manager of catastrophe and weather insurance or reinsurance linked assets, which, has built itself a more direct line to the original source of the risk with established MGA, Velocity Risk Underwriters LLC.

It’s a sign of the flexibility and capability of the ILS marketplace to continue to attract investors and capacity to the space during the softening market, which is clearly impacting the ILS players as well as insurers and reinsurers.

In a different market cycle, or further down the line it might well be the case that catastrophe bond issuance rises again, and even outpace the growth of collateralised re structures, only time will tell.

But one thing seems clear; the ILS market is likely to continue down its growth path and with investors willing to participate in an attractive asset class, the acceptance of its features has the potential to increase across the risk transfer landscape.