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MONTE CARLO, Monaco — Insurance-linked securities passed their first major test during last year’s devastating hurricane season and have helped create a large, stable capital base for the reinsurance market going forward, experts say.
While alternative reinsurance structures, such as catastrophe bonds, collateralized reinsurance vehicles, sidecars and industry loss warranties, were hit by the more than $140 billion in 2017 catastrophe losses, investors quickly returned to the market after the storms, they say.
As a result, cedents and brokers can focus on the structure of reinsurance programs rather than the price of the coverage, they said at the Rendez-Vous de Septembre in Monte Carlo, Monaco, last week. The Rendez-Vous is the first of the major international reinsurance meetings that take place in September and October.
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, CEO of Aon Securities, a unit of Aon PLC.
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 not losses — quickly reinvested in the market after the 2017 storms, he 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 Mark Hvidsten, deputy chairman of Willis Re in New York.
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 provides 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.
A report by U.K.-based investment firm J.P. Morgan Cazenove Ltd. said that insurance-linked securities players have forced reinsurers to adjust their business models and focus more on securing underwriting deals and proportional treaty business, Artemis.bm reports. Reinsurers are likely to focus on opportunities in proportional reinsurance, tailored transactions and specialty markets while using ILS for hedging and retrocession.