Conning: ILS could become victim of its own success

Conning warns that the ILS and reinsurance markets may face a clash of cultures as the two converge, while the ongoing success of ILS could yet serve to dent pricing in the space.

Two industry reports issued back-to-back by Conning & Co highlight the complex relationship between insurance linked securities and the traditional reinsurance market.

According to the reports, while ILS are a source of competition for traditional reinsurers—limiting pricing power and pushing reinsurance rates down— they are also valuable tools for raising third party capital in a difficult economic environment. The reports conclude that the convergence of the capital market and the reinsurance market will accelerate and ILS will gain traction, particularly after the strong showing in 2012, but that ILS may prove a victim of its own success.

The author of the report writes: “this convergence of reinsurance and capital markets will continue to play out, although returns for reinsures and ILS investors are likely to suffer.” This, according to the second report, could be a signal that the ILS market is a victim of its own success as additional capital creates downward pressure on prices and ultimately low returns for investors.

Regardless, the second report concludes: “the ILS market is here to stay and will likely capture a larger share of risk transfer financing. We see a continued convergence, or maybe a clash of cultures, between the capital markets and the traditional reinsurance market. Both these markets have distinct roles to play; however, the convergence will come with some healthy competition.”