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Alternative reinsurance market set to rebound after losses: Experts

Alternative reinsurance market set to rebound after losses: Experts

MONTE CARLO, Monaco – Reinsurance capacity supported by capital markets has declined over the past year, but many institutional investors remain interested in the market as it slowly expands to cover a wider range of risks, experts say.

An alternative reinsurance placement for U.K. terrorism risk placed earlier this year marked a significant development and more new coverages, possibly including coverage for cyber risks, could be developed, some say.

ILS experts and others discussed the market during formal presentations and private discussions at the Rendez-Vous de Septembre reinsurance meeting being held in Monte Carlo, Monaco.

The insurance-linked securities market, which includes catastrophe bonds, collateralized reinsurance, industry loss warranties and sidecars, offers about $93 billion in total market capacity in 2019, down from $98 billion in 2018, according to Aon PLC.

Capacity was in part constrained by capital “trapped” by catastrophe losses over the past two years that cannot be released to investors while the claims are still being estimated and paid, experts say. Some catastrophe losses, for example, losses from Typhoon Jebi in Japan and Hurricane Michael in the United States last year, proved to be significantly higher than estimates made shortly after the storms.

However, most ILS investors still view the reinsurance market as an attractive investment, they say.

“After two years of losses, if would be surprising if investors weren’t at least pausing and saying ‘before I stump up another whole lot, let me just understand whether this is likely to keep happening and what are the characteristics of these losses,’ because the loss creep was disconcerting,” said Mark Hvidsten, deputy chairman of Willis Re in New York.

Although ILS products have been available for well over a decade, early catastrophe bonds covered very high reinsurance layers, but in recent years the various products allow capital markets investors to participate on lower layers and those layers are more likely to be hit by losses, said Caleb Wong, senior portfolio manager at Invesco US, a unit of Invesco Ltd., in New York.

For example, the 2005 hurricane losses, including Hurricane Katrina, were “a very small whisper” for the ILS market, but the losses of 2017 and 2018 resulted in significantly more losses for ILS investors, he said.

Third-party capital providers are “learning about what it means to go through an entire loss cycle,” he said during a panel discussion at the meeting sponsored by Munich Reinsurance Co.

However, the reduction in capacity its likely to be just a pause in the growth of the ILS market, Mr. Hvidsten said.

Investors remain attracted to the ILS market because it provides a class of assets that are not correlated to traditional investments and insurers and reinsurers use the vehicles to diversify their credit risks, among other things, Mr. Hvidsten said.

In addition, “the yield on cat bonds is looking very attractive relative to other fixed-income instruments right now,” said Mr. Wong.

Greater transparency between ILS managers and investors has increased understanding of how the structures work, said Paul Schultz, Chicago-based CEO of Aon Securities, a unit of Aon PLC.

“There’s no question that we’ve had some difficult times over the past couple of years, but I think we’ll definitely come out stronger as a result. Fundamentally, the value of bringing noncorrelated risk to investors has been proven,” he said.

The classes of business covered by ILS products are also expanding, Mr. Schultz said. Earlier this year, for example, Pool Reinsurance Co. Ltd., the London-based terrorism reinsurer backed by the U.K. government, secured $75 million in cat bond coverage for physical damage caused by terrorism.

In addition to terrorism coverage, “I still think we are going to see cyber come into this market as well,” Mr. Schultz said.

But cyber risks present a challenge to ILS investors, said Mr. Hvidsten of Willis Re.

“They have to post collateral to support their participation so how do you figure how long it takes for a cyber event to manifest itself, how long will the capital be tied up? You have less information than you do with cat risks where you have hundreds of losses to look at to get a view,” he said.

But there is an appetite with ILS investors for cyber and other liability risks, said David Priebe, chairman of Guy Carpenter LLC in New York.

“The challenge with liability is the duration risk and within the capital markets they want to have some degree of certainty for when that capital can be released … we’re getting closer to developing solutions and approaches to do that,” Mr. Priebe said.






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