ILS market undergoing a ‘reset’

The insurance-linked securities market is undergoing “a reset” and an influx into catastrophe bonds and sidecars suggests investor optimism remains strong around the products, according to Artex Capital Solutions. 

But Arthur Gallagher unit Artex said in its half-yearly Alternative View publication that long-term growth may require additional innovations, “such as parental guarantees to draw in institutional investors and improve returns”.

The report also said there was continued interest in the Lloyd’s market as a means of diversifying property cat portfolios with casualty and portfolios with casualty and specialty risks via structures such as London Bridge 2. 

“As the renewal season approaches, stakeholders anticipate a cautious outlook with sustainable terms and conditions and adequate risk/return pricing,” the report said. 

Despite the discipline showed by reinsurers on rates and attachments points, the report said institutional investors remain cautious  about putting more money into the market, said Artex, which has substantial operations in Bermuda. 

“The efforts of portfolio managers to course-correct on attachment points and terms and conditions show their willingness to adapt and move toward sustainability. 

“Nonetheless, some investors still view the private sector with some caution and are conservative in their approach, with lingering concerns about uncertainty and volatility in the private ILS market. 

Institutional investors are the most hesitant, likely di to losses incurred over the past seven years, exhibiting reluctance to invest further or expand existing investments until they are concerned that recent market changes represent a true reset.”

Scott Cobon, managing director, insurance management services, added: “institutional investors, particularly pension funds, are generally hesitant about allocating further in this asset class due to lingering structural limitations. 

“However, there is interest in solutions, such as contingent capital structures, and we are working to solve the broader problems of trapped collateral by leveraging our size and diversification of client base with innovative products,” said Cobon, who is based in Bermuda.  

The report said: "One of the key themes that emerged from the Monte Carlo  Rendez-Vous in September was Bermuda reinsurers' intention to maintain discipline. While the ILS market in Bermuda had a successful year in 2023, the sector is focused on building a sustainable market that will convince investors of its ability to generate that will convince investors of its ability to generate consistent returns over the long term."

The report said the cat bond had seen “exceptional growth” driven by an increase in new sponsors and investor interest, spurred by the exposure certainty, risk-remote structure, attractive insurance risk spreads and collateral yields.

“We are still seeing interest in casualty and MGA sidecar arrangements, and several entities are working on efficient ways to secure casualty,” it said. “The need for accurate, real-time date to give investors comfort around casualty risk and duration is challenged by the industry’s typical cycle of quarterly reporting. 

“However, at Artex we are optimistic tat there will be a shift over time of capital to casualty.” 

On captive insurance, where Bermuda is a leading domicile,  Artex said: “Interest in alternative risk transfer solutions remains strong despite stabilising  US property rates and a general flattening across Eiuropean and Asia-Pacific retail lines, particularly for cyber and D&O insurance. 

Barry White, executive vice president for sales, analytics and advisory for Artex Risk Solutions, North America, said: “Health costs are skyrocketing for US companies and they are looking at how funds this differently.

“The concept of medical stop-loss insurance is gaining traction in the captive market, particularly for group captive solutions.”

The report also said that mature captives are exploring diversification into areas such as employee benefits, loss portfolio transfers to release capital for new business lines, and even parametric solutions. 

It added: “In North America, Alberta is gaining traction as a captive domicile, offering tax and proximity benefits over offshore locations, while Texas and Georgia are also growing in popularity. 

“In Europe, Italy and Spain are following France’s lead in promoting onshore captive formations.” 

The report also said captive syndicates are gaining interest, especially from multinationals with gross written premium of more than $30 million, with Lloyd’s offering financial strength global licensing and reputational advantages. 

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