An expert panel of reinsurers, investors and other industry specialists predicted that insurance linked securities (ILS) are likely to grow in both scale and maturity in the year ahead.
A lively discussion, facilitated by Munich Re on day two of the Rendezvous-Vous de Septembre held in Monte-Carlo, put ILS under the microscope in the hope of establishing where this relatively new asset class was likely to head next - and what impact that could have on the reinsurance world.
KBW vice president Christopher Campbell gave some context to the growth of ILS when he said, “The large catastrophes of last year leading to price reductions at renewal time didn’t happen. The traditional model for Nat CAT seems to be broken.”
Further anecdotal evidence of the breakdown of the old Nat CAT model was not hard to find amongst the panellists. Citigroup - Risk Management Solutions managing director John Modin said, “Loss adjustment expenses were higher than expected last year,” indicating that a change in funding dynamics would be welcome, paving the way for greater use of ILS.
World Bank treasury head of derivatives and structured finance Michael Bennett concurred when he said, “We did not see the pricing impact that we had been warned about”, following on from the catastrophes of 2017, but he predicted that two consecutive years of such excessive losses could have the impact expected.
Munich Re head of global clients and North America division Peter Roder made the point that it was difficult to forecast what would become the norm for ILS because it was such a new asset class. “Last year was the first time that alternative capital had been quite so evident in the reinsurance market,” but he went on to say, “Last year was a simple supply and demand game. No more. No less. We achieved some price increases last year. Not much, perhaps only 2%.”
The theme of pricing was, predictably, very much top of mind at the round table. AXA Global Re head of group reinsurance Guy Van Hecke confirmed that many players had been caught on the hop last year, making pricing difficult. “The market has changed. It’s not like before. We were surprised,” he said.
It is this breakdown that has left the way open for alternative sources of capital — and this was largely welcomed by investors represented at the round table. Amundi Pioneer managing director Chin Lui said, “ILS will continue to be part of the reinsurance industry. We were a little surprised at how our investors responded to losses.”
“The supply and demand was driven by a very positive year for every other asset class. This motivated them to look for further diversification. We need to rethink our payback model. We just can’t rely on the old model,” he said.
Mr Bennett went on to say, “We have only scratched the surface of the transfer of risk from Nat CAT.” He then indicated that the World Bank was also looking into other areas of risk transfer. “We are also looking to see if we can extend the coverage of insurance to human pandemic catastrophes. Or could famine be insurable? This is one of the next, esoteric insurable areas we are looking at.”
Mr Chin concluded by saying, “ILS managers might be happy to stand up and cover the risk. ILS investors come looking to make a profit. In the end it comes down to pricing. If it’s too high, the buyer won’t be motivated. If it’s too low, all your profit could be wiped out. Understanding pricing is crucial.”
The Rendez-Vous de Septembre concludes today in Monte-Carlo.