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MONTE CARLO, Monaco — One year after the devastating 2017 hurricane season, reinsurers and brokers acknowledge that the rise of insurance-linked security facilities over the past decade has transformed the market.
The more than $140 billion in losses from hurricanes Harvey, Irma and Maria and other catastrophes did not result in widespread sharp increases in reinsurance rates, and ILS investors, which suffered significant losses for the first time since the alternative market has matured, did not shy away and instead increased their investments in the market.
The various ILS products, which include collateralized reinsurance, catastrophe bonds, sidecars and industry loss warranties, ensure there is plentiful capacity for catastrophe risks and provide reinsurers with additional retrocessional capacity to support their business.
Meeting at the Rendez-Vous de Septembre in Monte Carlo, Monaco, last month — the first of the major reinsurance meetings that take place in the late summer and fall — several market participants said alternative capital has helped create a stable market with less severe peaks and troughs that could lead to improved coverage for cedents.
“ILS has become an enabler of ways to think about matching risk to capital, and participants in the insurance industry are now very open to the idea of using other people’s capital to finance risk they assume,” said Mark Hvidsten, deputy chairman of Willis Re in New York.
And investors in ILS products are becoming more comfortable with the structures and are exploring other types of exposures that can be covered, he said. Investors are more willing to cover liability exposures and unmodeled risks, such as auto liability exposures, he said.
Alternative capital providers paid reinsurance claims after the 2017 hurricanes, and the sector is now “an important part of the business and will continue to be an important part of the business going forward,” said Paul Schultz, Chicago-based CEO of Aon Securities, a unit of Aon PLC.
While much of the ILS market involves private placements and losses are not disclosed, several sources at the Rendez-Vous said they believe ILS facilities paid out something north of $10 billion in losses last year.
Despite the losses, investors in collateralized reinsurance vehicles — trust accounts created using funds from third-party capital where the funds and profits are released back to the investors if there are no losses — quickly reinvested in the market after the 2017 storms, Mr. Schultz said.
And in the 12 months ending June 30, 2018, catastrophe bond issuance hit $9.7 billion, which was down from the $11.3 billion in prior 12 months, but still a healthy rate of issuance, Mr. Schultz said.
“Investors more concentrated in hurricane bonds may have experienced a slight loss (from the 2017 storms), but nothing that’s difficult to rebound from,” he said.
With traditional reinsurers and abundant alternative capital, the reinsurance sector has sufficient stable capacity, said David Priebe, vice chairman of Guy Carpenter & Co. LLC in New York.
“There’s ample capacity — both dedicated capital and flexible capital — and that capital continues to grow,” he said.
In 2018, there is approximately $447 billion in capital dedicated to the reinsurance sector, which is a 4% increase over 2017, and about $96 billion of the 2018 capital comes from alternative capital vehicles, Mr. Priebe said.
“That allows us to say to clients, ‘What are your needs and what’s the most cost-effective structure to meet your goals,’ and then tailor the solutions,” he said. “Five years ago, the market would say, ‘Here’s the suit I make; I hope it fits.’”
“Reinsurers have often gone through spells when they are price-driven, but I think everybody is now aware that they need to be client-centric … it’s a pivotal change in the way to think about the business,” said Mr. Hvidsten of Willis Re.
Capital markets, which previously participated in insurance and reinsurance by holding equity investments in traditional insurers and reinsurers, are now able to get more directly involved in the business through investments in alternative capital vehicles, he said.
Increased use of sidecars and collateralized reinsurance vehicles also allow reinsurers to move toward more “capital-light” structures, which provide higher returns for equity investors, Mr. Hvidsten said.
Going forward, the ILS sector will be an established part of the global reinsurance market, said Chin Liu, a Boston-based managing director at Amundi Pioneer Asset Management, which invests in insurance-linked securities.
“It’s no longer a niche alternative asset class,” he said.
ILS investors and investors in other forms of alternative capital were not deterred by the 2017 losses, in part because they understand the risks involved but also because other asset classes produced good returns last year and “that motivated them even further to look for diversification,” Mr. Liu said.
ILS products could potentially take a larger share of the reinsurance market, said John Modin, a New York-based managing director at Citigroup Inc.
ILS makes up about a quarter of the capital supporting the reinsurance market, he said. “There is still room to grow … I don’t think it will ever be a half, but a quarter to a third is where it may end up,” Mr. Modin said.
MONTE CARLO, Monaco — Insurance-linked securities act as a check on reinsurance rate increases, holding back sharp rate hikes that historically have followed major catastrophes and reducing the profit potential of traditional reinsurers, observers say.