The third in our series of articles featuring the thoughts of leading figures in insurance-linked securities (ILS) and reinsurance on the market as we move into 2015 features Rob Procter, CEO of Securis Investment Partners.
We asked for participants thoughts or predictions on the prospects for the ILS market, catastrophe bonds, collateralized reinsurance as well as reinsurance or catastrophe risks as an asset class in 2015.
Rob Procter, Chief Executive Officer of specialist London-headquartered insurance and reinsurance-linked securities investments manager Securis Investment Partners, gives us his thoughts on how ILS will develop in 2015 as well as some new insight on new initiatives at Securis.
His response follows in full below:
In an aggregate sense, ILS markets will continue to take market share from traditional reinsurance carriers. Currently this stands at around 20% but is likely to rise further in 2015 and beyond.
ILS markets are collectively acting as an “agent of change” in the way the reinsurance industry is structured and capitalised. The much lower operating expense base of ILS firms like Securis becomes increasingly important as a competitive advantage as the overall level of pricing falls, and net margins erode – in some cases to near zero for traditional players. This competitive advantage will be felt even more keenly in 2015.
Some have talked of a natural ceiling of the share of catastrophe reinsurance business that ILS markets can take – due to issues such as the need for reinstatements, or multi-year covers, which are desirable to buyers, but not so easily provided by collateralised markets. We view these characteristics as challenges which we will inevitably overcome; in some cases we already have.
Against this market backdrop, M&A activity will continue to increase in 2015. This has jumped recently with announcements relating to Ren Re and Platinum, XL and Catlin, and Montpelier Re. Given traditional carriers will have to find ways to reduce operating expenses, this activity is a natural development.
M&A activity within the ILS space may in theory make sense, but is harder to execute in our view. This is perhaps largely due to the operational disruption in the wake of such deals, which may be undesirable to many investors given the perception of a negative performance impact in the short/medium term.
Meanwhile, 2015 may be the year in which the shortcomings of the reinsurer-sponsored ILS business become more evident. In our view, this model is riddled with conflicts of interest, which may be less obvious in a time of relatively light catastrophe losses, but which would become far more evident should material loss events occur. Reinsurers may ultimately look to spin-off their own ILS units.
The savviest ILS managers will look to de-emphasise their “long catastrophe” bias. While significantly growing Securis’s gross presence in the catastrophe reinsurance space in recent years resulting in stronger bargaining power and becoming a more meaningful partner for protection buyers, this de-emphasis of the long side has been an aim embedded in Securis strategy for some time. At Securis, we are achieving this in a number of ways.
First, by diversifying more into specialty lines; in 2014 we launched our first Lloyds’ Corporate Member Fund, and we will build further on this in 2015. Second, by further building out our life business – which now has a track record of close to ten years. In our view, Solvency II will act as an important catalyst in the development of the life ILS and securitisation space. Third, we are exploring ways to be more involved in primary insurance to the extent it is profitable, and in situations where we are better or more efficient owners of risk than traditional carriers. And fourth, we will continue to develop our outwards capabilities during 2015.
We come across many transactions which, in our view, are simply unprofitable. In these situations, we would rather buy protection than sell – to the extent there are competitor businesses that are prepared to take the risk on.
The overall trajectory of pricing will not change any time soon in our view – barring a major catastrophe event costing the industry $50-100bn. But the flipside of this is that new opportunities will likely continue to present themselves – relating to national disaster programmes (eg Flood Re in the UK), more protection buying in emerging markets such as China or India, or opportunities created out of accounting / regulatory change, for example, greater scrutiny of how corporate balance sheets would hold up in the event of an external shock or disaster.
These developments, and others, will likely present opportunities which we will pursue vigorously as we look to further grow and develop Securis.
Our thanks to Rob Procter for his time.
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Artemis’ Q4 2014 Catastrophe Bond & ILS Market Report – A busy finish to a record year for ILS
We’ve now published our Q4 2014 catastrophe bond & ILS market report.
This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the fourth-quarter of 2014, looking at the new risk capital issued and the composition of the cat bond & ILS transactions completed during Q4 2014. It also includes a brief review of the full-year 2014’s record issuance.