The insurance-linked securities, catastrophe bonds and collateralized reinsurance sector’s share of the global non-life catastrophe reinsurance market is set to double by 2017, according to insights contained in a report on the ILS market published by clearpath analysis. The report is titled Insurance-Linked Securities for Institutional Investors 2013, features insights from professionals within the ILS and collateralized reinsurance space.
The report features a broad cross-section of participants from the ILS space, including but not limited to investors, ILS investment managers, investment managers from pension funds, structuring specialists from reinsurance brokers, risk analytics professionals from reinsurers, people working on the administrative side of ILS and investment consultants. As such it contains up to the minute insights and thinking on the ILS market.
The report says that institutional investors hunt for yield continues, in the currently uncertain and difficult economic climate, and uncorrelated alternatives such as insurance-linked securities continue to become ever more desirable as a result.
The Eurekahedge ILS advisors insurance-linked securities fund index has returned a very healthy 2%+ already in 2013, helping to demonstrate the attraction that the ILS asset class now holds.
The report discusses trends in the catastrophe bond and ILS market, which had a near record year in 2012, and also looks at the effects traditional reinsurance such as the struggle reinsurers have faced in raising, or even maintaining, some traditional reinsurance rates. With many reinsurance programmes coming up for renewal and a new search of third-party ILS capital looking to access the reinsurance business the report discusses industry expert opinions which suggests that the size of the ILS markets share of catastrophe reinsurance could double by 2017.
The current market for non-life catastrophe reinsurance capacity is about $180 billion; essentially the total capacity purchased in the reinsurance industry by primary insurance companies. Of this, the pure non-life cat bond market is roughly $14 billion, but at to that the $15 billion collateralized insurance market and it brings the total close to $30 billion. This number is expected to grow considerably over the next 5-10 years and as a result up to a third of the entire market around $50-60 billion of capacity, may be provided by investors by 2017.
The collateralized and ILS market looks to have grown by around 29% in less than one year. If that sort of growth rate continues then we could easily see $50-60 billion, or more, of non-traditional reinsurance capacity in the global property catastrophe reinsurance market by 2017.
The trend for third-party investor capital to flow into the reinsurance market shows no sign of letting up either.
There is no question that there is interest from investors to bring more capital to catastrophe risk as investors are searching for assets that are not correlated to stocks or bonds.
There is increasing trend for this capital to be deployed in private reinsurance transactions in recent years. Activity in the private transaction market has picked up noticeably since the financial crisis in 2008 as insurers are more sensitive to the embedded credit risk in a traditional reinsurance transaction.
The report says that reinsurance has a potential to become a real source of long-term investment yield for capital markets investors. The market will be profitable because the insurance market depends on catastrophe reinsurance; and no other line requires similar levels of capital to stay afloat. Not only this, large losses trigger capital shortages which are followed by premiums, price increases and capital influx. For these reasons, catastrophe reinsurance in general is unlikely to follow the fate of other reinsurance lines which have remained in deficit in years.
The number of state-backed insurers that have come to market recently has increased, which is intriguing especially from an administrator’s perspective.
It is interesting to see what areas of the industry are attracted to the ILS market and who utilizes the products and this will hopefully lead to further new cedants entering the market, said the report.
The report suggests that 2013 may be as positive as 2012, or even perhaps more positive, in terms of deal-flow, issuance of ILS and cat bonds and growth of collateralized reinsurance.
2013 is currently on pace to exceed 2012 as sponsors continue to embrace the effectiveness of capital markets-based protection in their risk management programmes. Conservative institutional asset managers, the custodians of trillions of dollars of investable assets, have largely accepted catastrophe risk as a component of mainstream investment strategy.
This is a really big deal. Some of these large institutional asset managers have recently added insurance as an asset class that they are targeting. Some of these large institutional asset managers have hired internal specialists to do diligence on the ILS and catastrophe risk space and are involved in investigations into the best way to deploy capital into the space. This is where the potential for real growth lies, not a slow trickle of additional capital but in years to come a veritable flood if these conservative asset managers maintain their interest in the space and it proves attractive over the longer term.
The report sensibly notes that while ILS and reinsurance are currently extremely attractive asset classes, investors really need to ensure they understand the risks associated with them as alternatives.
Investing is difficult business – even for professionals. When one is confronted with a myriad of choices, there is a tendency to default towards certain key metrics when comparing multiple products all seemingly operating in the same space. Thus, it is vital for investors to have a full risk distribution of potential outcomes for the investments being contemplated. It is essential that investors do their homework on the sector, analyzing the space so that they understand the structures and costs associated with accessing the market as an investor. Hence, investors tend to perform due diligence on investment options for months and sometimes years before allocating capital into ILS.
There are many risk considerations to be made when investing in ILS. The different types of risks embedded in the sector require a combination of insurance, structured finance and trading expertise as material inflow of capital into sector has caused some volatility in generating mark to market gains for existing investors.
Source: Business Insurance