To the extent that investors are swapping capital around the market rather than withdrawing it in response to the tests that the past five years have thrown at ILS portfolios, the net result will lean more toward ongoing reshuffling of assets rather than retractions. But any time that investors start withdrawing - which has happened in isolated instances – the market will be concerned that herd instinct reactions could trigger more departures, even if the withdrawals only impact specific ILS firms.
At the same time, there are some positives. As reinsurers increasingly limit their appetite for catastrophe volatility, the floor is open for further ILS market growth – which is showing up in the cat bond segment.
But the question is whether the sector is in a strong enough position in having the confidence of investors to seize on this opportunity, or indeed whether it represents a sufficiently good opportunity for investors at this point: rate gains have been modest.
We will undoubtedly see an ongoing increased emphasis on ESG pitches, and ESG-friendly strategies, as well as non-catastrophe offerings. In terms of primary market/MGA access, the outcome is harder to call as the lure of rising rates is offset by recognition of the challenges of social inflation and recent loss history.
For some firms with new management in place – several of the aligned ILS managers that leap to mind are AlphaCat, PartnerRe, Axis and Lancashire - the challenge will be redefining their proposition under new leadership.
Whereas for other ex-independents such as Nephila, it might be continuing to elevate the next generation of leaders.
For the catastrophe sector as a whole, it is hard to make forecasts for a segment in which profits are based on fortuity. If 2021 had been a less eventful year, the current outlook might not be quite so challenged and the path of the January renewals might have been far less stressful.
Catastrophe – restructuring and repositioning
Reinsurers’ attitudes to catastrophe risk have undergone a 180 degree shift from prior market eras, when cat risk was the profitable cream on top of their portfolio. Now, it is more likely that brokers will be twisting underwriters’ arms to write more struggling cat placements in exchange for access to sought-after casualty programmes.
Reinsurers are having to reassess their stance on what the “new normal” level of catastrophe activity looks like – in a business segment dedicated to taking on volatility and handling the concept that there isn’t really any such thing as a “normal” disaster event.
But regardless of how Mother Nature treats cat reinsurers this year, some ongoing issues will keep the industry’s focus on catastrophe risk, and maintain upward pressure on rates.
Firstly, ratings agency oversight will keep the appetite for volatility more constrained. S&P is consulting on changes to its methodology that involve stress-testing more extreme disaster loss scenarios than previously – which some expect could require double-digit increases in capital for carriers with heavy cat exposure.
Secondly, the seized-up retro market and higher costs of hedging means that more is riding on the net performance of catastrophe portfolios – again, suggesting that more caution will be built into portfolio construction.
We raised the question of whether a “bonfire of PMLs” was likely last September, and while the outcome of the renewal is far from suggesting this was the case, there has certainly been a lot of rebuilding of woodpiles from scratch.
Higher deductibles, hard event caps, limiting peril coverage: all of these are changes that are sensible and should reduce exposure to some of the expensive secondary peril losses that have cost reinsurers in recent years.
The question of how far it goes to rebuild profits for investors is yet to be seen. But as drum-beating over climate change risk grows, reinsurers must show that they will be part of the solution in taking on these risks...at the right price.
