The presence of institutional investor backed capacity from the capital markets, wielded by the world’s leading ILS fund managers is being felt in the U.S. primary commercial property insurance market, according to Standard & Poor’s.
The influence and reach of insurance-linked securities (ILS) backed capacity has been on the increase over recent years, as collateralized reinsurance structures enable the largest ILS fund managers to expand their remit into primary lines of business.
Alternative and third-party reinsurance capital from ILS funds has been adding to the pressure felt in commercial property insurance for some time, as lower reinsurance rates translated into savings for insurers and were passed on.
But now the pressure is more directly felt, with some of the largest ILS funds allocating their reinsurance capital directly behind pools and portfolios of commercial property risks, thanks to partnerships with broking facilities and fronting insurers.
S&P explained in a report that the presence of the capital markets has been most acutely noticed in the property catastrophe reinsurance arena. But that is changing, as ILS fund managers move their capital along the value-chain and find ways to source primary risk more directly and in bulk.
“Their presence has had the most acute impact in the U.S. property catastrophe reinsurance market, but is starting to flow into the U.S. primary commercial property markets as well,” S&P said, adding that new money entering the re/insurance market combined with a “relatively benign loss environment” will only add to pricing pressure.
Commercial property insurance rates have been seeing gradual pressure in recent years, but as the flow of capital markets money backing that sector increases we could see that accelerate.
The one potential saving grace here is that the reason for moving along the value-chain is to secure more direct access to risk and ultimately better margins, therefore the motive for pressuring prices is not so prominent.
However, as pressure begins to manifest in this market it is likely to stimulate greater competition, as was seen in catastrophe reinsurance markets, and it is this that may result in a more forceful downward pressure to emerge on commercial property insurance rates.
Hence ILS and the capital markets may not force pricing down alone, but their entry and appetite for commercial property risks may stimulate the competitive reaction that ultimately drives rates down.