13 March 2014ILS

Convergence allocation a long-term diversification strategy

Research by PwC has found that investors in the convergence space are pursuing long-term diversification strategies, not simply reacting to reduced yields elsewhere.

Scott Watson-Brown, alternative investments leader, PwC Bermuda, says that there is an expectation that there will be continued and significant interest in the catastrophe reinsurance space.

“Existing investors are putting more money to work and we are aware of a number of new investors progressing through their due diligence programmes to participate in this blossoming asset class.”

While there have been suggestions in some quarters that investor interest would flow away from the industry once yield picks up elsewhere or following a major loss, research by PwC suggests that investors are increasingly sticky in their allocation.

“Our analysis points to an investor base that demonstrates a fundamental understanding of the risks to which its capital is exposed; portfolio allocations are made with this understanding, and allocations are being made following months or even years of in-depth due diligence,” says Watson-Brown.

He says that for investors in the space it is critical that they understand “how a bond or similar structure will perform in the instance of a catastrophic loss and just what spectrum of risks you are exposed to.”

Innovate to differentiate

Meanwhile there has been a surge in traditional players increasing their involvement in the third party space. While Watson-Brown contends that for some this is an “openly defensive move”, many are looking to take advantage of broadening capital markets interest in the space.

He says that the success stories will be among those players that can innovate and differentiate themselves through “proven reinsurance programmes”.

Transactional activity in the property catastrophe space is at its highest point in several years and there is an expectation that this will continue into 2014, says Arthur Wightman, insurance leader, PwC Bermuda.

“Consistent with 2001 and 2006 activity, it’s concentrated in Bermuda, once again affirming the attractiveness of the domicile as a sophisticated centre of excellence for reinsurance and innovation,” he says.

Wightman adds that he expects to see the property catastrophe reinsurance model to continue to evolve, with “long-term resilience and policyholder protection” remaining at the heart of what the industry does.

Wightman believes there is a bright future of partnership between the reinsurance and capital markets, but insists that it must be one that unswervingly focuses upon client needs.