The Insurer TV: ILS appetite played key role in moderating Florida rate rises
Strong investor appetite for ILS as an asset class has had a key role in the Florida renewal, with falling cat bond and industry loss warranty pricing and increased participation from collateralised writers a major factor in the moderation of overall rate increases at 1 June.
As reported at the end of last week, average pricing at the Sunshine State homeowners property cat reinsurance renewal is expected to have settled in the mid-single digits to low-teens range, depending on the quality of the cedant.
Speaking in the latest episode of The Insurer TV’s Prospective series, Aon Securities CEO Paul Schultz said the cat bond market has returned to pricing levels last seen two to three years ago.
This has led to significant activity even for Florida risk, which had been one of the more constrained markets last year with a late renewal season and private layers required to get some deals done.
“This year it seems much more orderly and ILS has been growing its participation back into some of the Florida market risks,” Schultz commented.
ILS participation has been more selective than at times in the past, with cedants that have performed better on a relative basis targeted.
“But the absolute pricing levels have made ILS in many regards more competitive than traditional reinsurance. That ‘efficiency’ in the marketplace has led to increased demand,” he added.
The transformation at the current Florida renewal compared to 12 months ago demonstrated the interplay between the ILS and traditional reinsurance markets.
“Right now the dynamic is that ILS markets are leading the traditional markets in terms of an aggressiveness or willingness to expose capital at slightly lower returns.
“The traditional market is still of the mentality that rate increases are necessary to get to an adequate return level, whereas the ILS market is just a bit more aggressive,” said the Aon executive.
Swiss Re Alternative Capital Partners’ global head of ILS distribution Judy Klugman disputed the role of the cat bond segment in driving traditional reinsurer behaviour at the renewal, however.
“Our market is very transparent and we put out pricing sheets for over 100 bonds…every week and month so everyone in the market is very aware of where things are pricing. I would think that would have some impact but it shouldn’t be the sole determining factor.
“Do I think that reinsurance is going to be driven by where capital markets capacity is? I absolutely do not. There are different structural benefits of traditional versus capital markets and vice versa – they really are two separate products that will have separate pricing cycles,” she argued.
The significant role of ILS in Florida
Niklaus Hilti, head of insurance linked strategies at Credit Suisse Asset Management, highlighted the significant part the broader ILS market plays in the Florida renewal.
He noted that the cat bond market has seen a continuity of issuers from the Sunshine State transferring risk.
And over the last decade other areas of the ILS market have increasingly come to the fore in Florida, with a combination of private deals, participation on traditional placements either on a collateralised basis or through fronting companies, as well as reinsurance companies ceding to sidecars.
“In Florida overall with the cat bond market as well around 50 percent of the risk goes somehow to ILS investors. That means it’s a very important part of the risk transfer for that state,” Hilti commented.
And Integral ILS managing partner Richard Lowther said he expects the role of collateralised reinsurance to only grow.
He said that while there had been outflows of investors following loss activity and issues around trapped capital, there have also been meaningful inflows.
“Net-net we believe the capacity in the collateralised market is very stable and it will continue to grow,” he said.
Click below to watch the latest episode of Prospective, in which we explore the key drivers spurring growth in the ILS market, the impact of Covid-19 on investor appetite, lessons learnt from major loss years, ILS at the mid-year renewal, and the future of the ILS market and the “next frontier”.