Catastrophe bonds have been “the most successful of the children of Andrew,” and because of their greater contract certainty and performance, Michael Millette, Founder and Managing Partner of Hudson Structured Capital Management, expects more of ILS capital to shift into the bonds segment of the market.
Millette sees growth opportunity and also a need for more insurance-linked securities (ILS) capital to support peak risk exposures through reinsurance provision.
He also expects to see the ILS market continue to expand its remit and investors to look to access new classes of insurance and reinsurance business.
Speaking during a panel discussion hosted by reinsurance firm Munich Re yesterday in Monte Carlo, Millette explained that he does expect investors to keep putting capital into reinsurance, through ILS.
Part of the reason for this is that catastrophe exposures continue to expand.
He said that, “It makes sense for investors to come back, cat risk is going to grow. It’s growing because the existing risk is being inflated, social and economic and also frequency, and it’s growing because more of the world is coming into the cat regime.
“When we have growth and density, we have more cat risks. So we’re seeing larger events in Europe and Asia and LatAm than we’ve had in the past.”
Millette believes we will see growth of the ILS market at the expense of traditional reinsurance capital.
“There’s more cat risk, and it’s likely that that will be dealt with, with a net market share movement from the traditional markets in peak risks to the capital market.
“And then within the capital markets, a net market share movement from collateralized, sidecar and other, into bonds.”
On catastrophe bonds, Millette continued to say, “Bonds have been the most successful of the children of Andrew. They’ve been documented well, they’ve performed better.
Asked what he expects to see over the coming year and what he believes the ILS market needs, Millette said, “More bonds, the bonds have had higher contract certainty, cleaner modelling, and more breadth.”
He elaborated to say that also, “Investors have been engaged by other parts of the insurance world and to the extent that they can put together broader portfolios, their appetite across this breadth will be higher.”