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The ILS market is likely to increase as capacity needs grow



MONTE CARLO, Monaco — The insurance-related securities market cooled in some areas in the second quarter, as economic turmoil and higher interest rates pushed investors into other investment vehicles, but market participants expect it to rebound.

Higher demand for reinsurance capital and the attraction of insurance risk as an investment uncorrelated to other capital market investments should strengthen the ILS market, they said during meetings at the Rendez-Vous de Septembre reinsurance meeting in Monte Carlo last month.

Issuance of disaster bonds fell 8.9% in the second quarter, compared to the same period last year, according to a recent report from Swiss Re Ltd. But estimated total alternative market capitalization was up about 1

% year over year, according to Guy Carpenter & Co. LLC.

Concerns in the broader capital markets this year affected capital raising in the ILS market, but the market appears to have stabilized, said David Priebe, New York-based chairman of Guy Carpenter.

Interest in ILS is returning as demand for reinsurance and retrocessional reinsurance capacity increases, he said.

“I think you will see continued increased ILS issuance and appetite,” Mr Priebe said.

Higher interest rates boost returns on ILS funds held in trust but also create other attractive credit investments for investors, he said. However, insurance investments still offer a diversified asset class to investors.

Political and economic turmoil and rising interest rates have resulted in investors shrinking from alternative investments, said Bill Cooper, head of capital advisory at TigerRisk Partners LLC.

With less money entering the market, investors are likely to look for underwriters and managers who have a strong track record in the alternative capital market, he said.

Catastrophe losses in recent years have resulted in “investor fatigue,” said Michael Millette, founder of New York-based Hudson Structured Capital Management Ltd. during a panel discussion sponsored by Munich Re Ltd. at the Rendez-Vous.

While reinsurance rates are rising, which will benefit ILS investors, they still need to increase 20% to 30% to reflect increased exposures, he said.

ILS asset managers are “more bullish” on the market and cedants became reassured about the sustainability of the ILS market as investors continued to invest capital after large catastrophe losses in 2017, Paul Schultz, CEO of Aon Securities, a unit of Aon PLC, said during the panel discussion.

“When we come to the different products in the ILS space, we see a better match today of the type of investors and investment horizon they have for that particular risk profile, so that in itself leads to sustainability and growth,” he said.

Lockton Re, a unit of Lockton Cos. LLC, launched a capital markets division during Rendez-Vous.

“It’s particularly timely given the constraints we expect to see in the cat market,” said Tim Gardner, New York-based global CEO of Lockton Re.

The department won’t have an income statement to meet, Gardner said.

“What we really want is for them to be able to work with clients in conjunction with the brokerage teams to say, ‘Is it a treaty solution?’ Is it a bonding solution? Is it a hybrid? and really explore the full spectrum of the option and then present a very agnostic view, he said.


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