As the traditional market met the capital markets head on with aggressive price reductions last year, the question now turns to what will differentiate the ILS sector in 2014 and beyond.
Should price continue to be its competitive edge, potentially sparking a price war with traditional reinsurance that could be to the detriment of both sides?
Or should ILS coverage move towards completely mirroring the traditional sector until no differentiation exists between the two on this front? The traditional market itself has already moved to replicate the more advantageous terms and conditions in ILS, such as multi-year cover.
Panellists said that it would take some time for the sheer momentum of investors' interest in the asset class to slow, as it is such a lengthy process to get into the sector, but there could be a turning point for pulling out of the sector if pricing and unfavourable terms override the diversification benefits of ILS.
From the cedants' perspective, once there is no longer a difference between terms, the attraction of having an alternative pot of capital to draw on post-event will still exist, but price will clearly become a major part of the reinsurance buying process.
The California Earthquake Authority (CEA), a long-time ILS market cedant, didn't use ILS last year for the first time in a while because it found a cheaper deal in the traditional sector although it plans to revisit the market.
As Tim Richison, CFO for the CEA, points out, it is a potentially positive sign that pricing may be hitting a low, as breaking a new floor could stimulate new demand.
Attracting new cedants to market would be the long-term answer for satisfying the ever-increasing pot of capital. And if price is the only means, then perhaps investors and traditional reinsurers alike should hold onto their hats and tumble down the pricing spiral.
This year has seen a fair number of new cedants issue cat bonds, and it is the perfect opportunity for them to enter the sector before a major event hits and the pricing and term advantages disintegrate or are dampened down.
With all this capital splashing around it is also the perfect time, as Luca Albertini, CEO of Leadenhall Capital says, to increase demand by targeting US legislation and regulation to tie insurance to mortgages.
The annual Sifma ILS conference, which tellingly has mushroomed from 50 attendees a decade ago to over 500, was the ideal setting for investors, cedants, traditional players and the crucial intermediary market to put their heads together and debate the differentiation question, among other issues.
Enjoy the read,
Karina Whalley
Senior Reporter,
Trading Risk
To view the Trading Risk Sifma Roundtable 2014 please click here.