A wall of money is coming into ILS
There is a wall of money coming into the insurance-linked securities (ILS) market, according to a hedge fund manager.
John Seo, co-founder and managing director of Fermat Capital, which has almost $11 billion in assets under management, said investors wanted to come into the market but were moving more slowly and doing more due diligence than in the past.
Seo, speaking at a panel at October’s Convergence conference on ILS, said the cost of capital coming into the re/insurance industry is undergoing a reset for the first time in half a century.
Speaking on the topic of the hard market and its likely length, Seo said the hard market is not being driven by lack of capital, but its cost.
“There is enough capital in the world,” Seo said. “Why is it not coming in? The cost of capital is being structurally reset in a once-in-50-year reset. The insurance world has changed in 50 years. It is global and more complex—the cost of capital for 70 years has been Treasuries plus 500 basis points.
“If you look at the ILS side of the market, cost of capital is synthetic,” he said. “The hard market is not an availability issue but a pricing issue at the top end.
“Investors have other things to do with their money, and what they can do with their money is very different. It has created a pricing shift all the way through the curve.”
Despite that, Seo said, there remains significant interest in the market, from new investors and from those who had previously been in the market and had come out.
“There is a lot more due diligence and chunks of money are still moving out.” John Seo, Fermat Capital
“The market is obviously attractive,” he said. “Money is staying in longer. The governance process is more complicated and the chain of command is distracted. Being second on the agenda means money comes in much more slowly.”
He added the fact that ILS, as an alternative, non-correlated investment market, operated in the less liquid part of the market, which is where private equity (PE) also sits. With PE making capital calls, it is more difficult to raise money, he said.
Despite that, he said: “I can see a wall of money coming in, but slower. There is a lot more due diligence and chunks of money are still moving out.”
A stickier situation
Lara Mowery, global head of distribution at Guy Carpenter, said: “This is not a hard market because a hard market means a product is just not available.”
She agreed that the hard market has not been caused by lack of capacity, unlike previous hard markets such as the 2005 version after Hurricane Katrina.
Mowery said the 2023 hard market was caused by a change in the way the market looks at risk. She said the period between 2017 and 2022, in which pricing remained static or fell, should have seen attachment points rising by 5 percent a year.
Instead, she said, “the correction happened all at once” in January 2023. “The drivers are different from those of previous hard markets. This is not supply and demand. It is other things.
“Insurers have to look at their programmes, but the change will take 12 to 18 months.” Lara Mowery, Guy Carpenter
“The reality is that pricing will fluctuate with every single renewal period, but the more significant change came in the structure of programmes and the increase in attachment points.
“Those changes are much stickier,” she said. “In 2023, 70 percent of programmes bore an increase of an average of 60 percent in attachment points. These are structures that actually make sense.
“It takes insurance companies a long time to accommodate the changes. Insurers have to look at their programmes, but the change will take 12 to 18 months.”
“Maybe we should drop the terms ‘hard’ and ‘soft’ markets.” Matthew Wilken, Hiscox Re & ILS
Matthew Wilken, chief underwriting officer of Hiscox Re & ILS, said the increase in catastrophe reinsurance attachment points meant that lower level catastrophes were no longer catastrophe products.
“Maybe we should drop the terms ‘hard’ and ‘soft’ markets and use disciplined and undisciplined markets,” Wilkens suggested. “There needs to be humility in businesses that insure catastrophes. There is also an element of uncertainty and that uncertainty has a cost.”
He noted that premiums have risen across all property and specialty lines.
“The subscription marketplace created a very difficult outcome at the end of 2022,” he said. “All reinsurers wanted to impose discipline across all lines. That discipline will endure but there will be more standardisation across the market. There is a real opportunity to focus on terms and conditions.”
Mowery said there also needs to be a change in mitigation, especially related to climate change.
“We are in a riskier place,” she said. “We can’t look at last six years and say we are not. There can’t just be higher prices. The essential part about is how to reduce the losses. Insurers need to tell clients do this in order to save 15 percent on costs.”
“It will take a number of years for investors to get confidence.” Jessica Laird, Nephila
Jessica Laird, head of property at ILS specialist Nephila, said customers had to see there is a cost to living in a high risk zone—for example, if you build a large house on the Florida coast.
“We are seeing positive reform in Florida which needs to be proven out,” she noted.
Laird added that more investment was being directed to ILS bonds, although investors were being challenged due to slow redemptions and “loss creep”.
“There is more opportunistic capital coming in, but capital is not that sticky. It will take a number of years for investors to get confidence. It takes more than one year.”
Wilken agreed: “Today climate change is everywhere, there is a rising risk environment and a totally different environment. I hope we have learned the lessons.”
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