20


September 2012 Bermuda Re/insurance


involvement in the space as institutional investors have sought to “broaden their asset portfolio, viewing ILS as a way of taking on insurance risk, but in a more specific way”. Markey did however raise a concern, namely: “the willingness of investors to pay claims and re-enter the marketplace post-event. That part of the test will be very closely watched”. Investors presently on the sidelines are waiting to see exactly what will happen when a major event hits the ILS space, Markey said, with the suggestion being that depending on how events and their implications for ILS products pan out, investors will either be attracted to, or withdraw from, the space.


There have been few major tests to-date, with only a limited number of ILS having been triggered, but as the market grows, more bonds will inevitably be triggered and—in some instances—potentially in correlation. A major correlating event will prove a litmus test, but there is already confidence within the industry that portable capital will continue to be an attractive choice to investors looking for a hedge against the capital markets.


Cough up


Helping to drive the involvement of new capital were concerns expressed following the financial crisis about the solvency of global insurers and the retrenchment of the reinsurers. “The crisis raised concerns about insurers’ ability to pay claims, while reinsurers retreated from certain risks and exposures,” explained Tim Faries, partner at Appleby, Bermuda. Events encouraged a more detailed search for alternative sources of capital in order to provide coverage for some of the really big risks, he said, risks that the finite reinsurance markets simply could not handle. Portable capital satisfied just such a demand, with influxes of ready capital able to enter and leave the market in response to both dislocations and overcapacity.


Watson indicated that demand for additional capital sources in the Cat Bond Historical Issuance (as of July 23, 2012)


Year Total 1996 1997 1998 1999 2000 2001 2002 2003 2004


45


612 692 828


1,136 980 990


2,135 1,143


Year Total 2005 2006 2007 2008 2009 2010 2011


2012 YTD


1,860 5,470 8,380 2,830 3,471 5,275 4,600 3,688


insurance sector had prompted rising interest in the alternative space. He said that the rise of collateral-backed players formed since 2008 was seen by many in the insurance space as a positive development. “As a company that buys a fair amount of reinsurance, the concern is that the bigger the event, the greater the danger of correlation,” he said. This raises concerns about the ability of reinsurers to pay, with credit risk a significant concern following such events.


“In the collateralised space, there simply isn’t that worry. We always hear discussions about the ability versus the willingness to pay. Collateralised reinsurance takes the ability to pay question off the table.” The security afforded by such coverage is a welcome feature for cedants. For traditional reinsurers, however, it is likely to be viewed as undermining their offering. Addressing the make-up of Argo’s insurance portfolio, Watson said that the company employs a mixture of traditional reinsurance, collateral-backed coverage and ILS. Other insurers have taken a similar route, encouraging investors to enter a space in which insurers increasingly shop.


Faries picked up on this point, indicating that the rise in interest in ILS “is only the latest iteration of a theme over many years of insurers looking for alternative forms of capital”. He said that products such as ILS, sidecars and collateralised plays were seeking to marry two disparate demands: “the desire of risk managers and insurers to access capital in a cost effective and competitive way vis-à-vis traditional products, and that from institutional investors—particularly following the financial crisis—for products that respond in a familiar way”. These new forms of capital seem to satisfy both demands and are, happily, uncorrelated from the wider financial markets and designed to be understood by the wider investor community.


Markey did however raise a concern, that despite the desire of insurers to diversify their sources of reinsurance, cedants are increasingly retaining risk. “That is a fundamental issue for the reinsurance industry—we wag the dog occasionally, particularly on cat lines, but pretty much everywhere else we are dependent on insurers’ need for capacity,” said Markey. “And if anything, it has diminished in almost every area, which is pretty scary.” The sector is not like it was 10 years ago, he said. Insurers and reinsurers are far better capitalised than they were in the past. This has meant that insurers are better able to live without reinsurance coverage, he said. Coupled with rising levels of portable capital, matters appear to spell trouble for the position of traditional reinsurers. Many are responding by getting involved in the alternative space. Those that aren’t, may risk being left behind.


Note - total includes property cat, life and health bonds issued 2012 YTD is up to Jul 23, 2012 Source: Aon Benfield Securities


Finally, the rising cost of loss events has also played its part. As Faries outlined, “the cost of events has grown exponentially, requiring increasing need for capital”. He said that ILS-type products were satisfying much of this demand at present, but that he expected “other iterations and permutations” to emerge in the coming years as the cost of insured losses inevitably rises.


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60  |  Page 61  |  Page 62  |  Page 63  |  Page 64  |  Page 65  |  Page 66  |  Page 67  |  Page 68  |  Page 69  |  Page 70  |  Page 71  |  Page 72  |  Page 73  |  Page 74  |  Page 75  |  Page 76