More discerning, less rush to commit capital – healthy ILS trends for 2019

A number of trends that are emerging in the wake of the major catastrophe losses of the last two years can be considered as healthy for the insurance-linked securities (ILS) market, according to industry experts.

After the major losses there now comes a bit of a capital crunch, particularly in retrocession markets, but the fact that investors are being more discerning about where they commit capital to and are in less of a rush to pile in after the losses, is seen as a positive for the longer term growth prospects of ILS.

Analysts at Goldman Sachs noted the potential for a pause in the growth of the ILS market and the fact that institutional investors are rethinking their approach to ILS and reinsurance-linked investing, but from our conversations with major pension funds in recent days, this is no bad thing.

Speaking at Goldman Sachs U.S. Financials Conference yesterday, panelists discussed ILS and alternative reinsurance capital and said that they expect the asset class will continue to grow over the long-term.

However, a healthy pause may be ahead to allow the market and its investor base to come to terms with recent loss experience, something we’ve been explaining in our series of articles about renewal market conditions and the influence of ILS and alternative reinsurance capital on them.

The panelists, who included Aditya Dutt of RenaissanceRe and Aurora Swithenbank of Goldman Sachs, noted the heightened uncertainty that the ILS market faces, as investors rethink both their current exposure and their risk appetites.

The fact ultimate losses from recent catastrophes remain unknown and there continues to be loss creep from the 2017 hurricanes, all suggests a late renewal season and greater upward pressure on pricing as a result.

Investors are showing signs of being more discerning over who they partner with, the panelists said. As we wrote yesterday, some major ILS investors are pulling back for the moment, while searching for more appealing opportunities in reinsurance.

In addition, some investors are waiting for a sign of where pricing is actually going at the January 2019 renewals before being ready to commit anymore capital.

This is in stark contrast to the 2018 renewals, the panelists concluded, when investors reloaded almost without question in some cases.

This is viewed as a healthy change for the market and bodes well for a healthier ILS market in 2019 and beyond.

The panelists expect that the retro renewals in January will provide a sign of how much capital can be expected to be made available by ILS markets through 2019, with the Japan reinsurance renewals in April also seen as a key juncture.

The panelists also said that they foresee ongoing expansion of ILS, as well as growth, with new opportunities in areas such as cyber risks, terrorism, and mortgage insurance, all likely to provide broader access to securitised insurance-linked returns.

In terms of what might slow allocations, ILS spreads and their yield relative to other asset classes appears to be seen as key, while interest rates are not expected to influence allocations given ILS’ generally floating nature.

But if spreads versus other assets is seen as key then the ILS market really cannot afford to allow further compression in 2019, particularly after such heavy losses. Hence there needs to be discipline at renewals and also a renewed focus on increasing the margin component, by further reducing the costs of transacting and accessing insurance-linked risks.

Read more of our coverage related to the upcoming reinsurance renewals.

Also read:

Lloyd’s renewals said in disarray. Late renewals may come back to bite syndicates.

Post-loss fundraising set to be more challenging for (some) ILS funds.

Traditional reinsurers targeting retro opportunities at renewals.

Reinsurance renewals may hold “surprise to the upside” – Twelve Capital.

2018 is the real test for ILS investors: Lohmann, Secquaero.

Cat bond liquidity benefits evident, as ILS funds sell to free up capital.

Some ILS funds struggle to even renew core portfolios, let alone grow.

Property catastrophe rates to rise at 1/1 & beyond: Everest Re management.

One sidecar pulled on lack of investor appetite, others questioned on terms.

Capital availability & losses to drive reinsurance rates at 1/1 renewals.

Retro losses could drive price increases in 2019: Goldman Sachs.