One of the ways that reinsurance giant Munich Re better insulates itself from the softening of reinsurance pricing, while also helping to ensure profitability, is to enter into as many privately negotiated reinsurance arrangements as possible, which is something the ILS market is learning quickly too.
Increasingly, ILS fund managers have been entering into private transactions, which are not syndicated more broadly around the investor base. Additionally ILS funds are sourcing risks from markets where they can gain a more exclusive level of access to risk, turning into originators as well as underwriters and managers.
As the rise of collateralised reinsurance has accelerated, a factor accelerated by the soft market along with ILS fund appetite to access more and better priced risks, ILS managers have sought out these private arrangements to improve returns, access more attractive layers of reinsurance programs and to secure risk away from the competitive nature of a more transparent syndicated deal.
Munich Re uses private, off-market reinsurance arrangements to secure larger shares of transactions, ensure the best pricing, avoid becoming ‘just another market’ in the renewal cycle, to dictate terms rather than be dictated to, but most importantly, because it can secure stronger relationships and insulate itself better from the competitive effects of the current soft reinsurance market.
The same reasons all apply in the ILS world and as the reinsurance market has become increasingly competitive, with pricing depressed by excess capacity, the ILS market has looked further afield and to its relationships to secure access to risk more privately.
Granted, ILS funds cannot yet do the very large deals a global reinsurance player like Munich Re can do, but they are securing private layers from some cedents, entering into private arrangements where a cedent wants hedging capacity and also setting up structures and arrangements with partners to acquire risk outside of the renewal cycle.
Of course, Nephila Capital is the best example of an ILS manager that has broadened its reach to areas of the insurance and reinsurance market where it can sources its own risk, away from the competitive renewals.
In fact Nephila’s initiatives mean that the catastrophe and weather risk investment manager can now access risk right through the cycle, if it so chooses. Other ILS managers are following suit, some in different ways, some also working with fronting MGA’s.
The ILS market has also been seen to build deeper relationships with larger cedents, in some cases helping them to establish structures that act as funded captives or sidecar-like vehicles for a primary insurance market.
We expect these initiatives to continue and perhaps accelerate, particularly while the market remains so softened and competitive. ILS funds are keen to innovate and also to create strong relationships, particularly with ceding companies that have already gained an appreciation for the fully-collateralised reinsurance product.
The other area ILS funds can secure direct access to risk, or private layers, is through innovation. Areas such as the weather risk market, or providing capacity to reduce and cover corporate property insurance deductibles, are both places new risk, with preferential access, can be secured.
It won’t mean the end of the renewal cycles, but in time it might mean that ILS funds can accept more investor inflows right through the year, which will be positive both for them and the end investor universe for whom waiting until a renewal to deploy capital may seem alien.
Learning from the largest and most successful reinsurers is a sensible strategy and companies like Munich Re can certainly teach the ILS market a lot about how to develop relationships that result in private sources of risk.