Rate hikes no longer a panacea for ILS fund results: AM Best
Rate increases alone are no longer enough to improve the underwriting results of insurance-linked securities managers and reinsurance companies, according to AM Best, who believes that after consecutive years of heavy catastrophe losses, the only answer is continuous improvement in the quality of risk portfolios.
For the past few years, we have explained in our coverage of the insurance securities fund (ILS) market that rate hikes are not the only way to improve the returns of reinsurance and retrocession portfolios.
Terms and conditions, structural improvements, attachment points, retentions are all factors that ILS fund managers have worked to improve, now through multiple renewal cycles.
In 2019, we explained that after the major losses of the past few years, the terms and conditions associated with renewing reinsurance, retrocession and insurance-linked titles (ILS), as well as how you access to risk, were gaining in importance for the ILS fund. managers.
These factors were considered just as important as the rates and the majority of SLI managers have worked hard to improve them with each renewal cycle over the past few years.
Around the June 2020 renewals, we wrote that ILS fund managers were shifting their portfolios to more distant risk layers in a tightening market environment, while the focus on conditions also continued.
Then, later that year, we discussed how ILS fund managers were building portfolios that can deliver much improved returns on insurance-linked securities (ILS), thanks to improvements that have been made in the face of to market disruption.
Finally, after the 2021 renewals, we explained that the ILS funds continued to renegotiate and adjust the terms and conditions, with named risks, foreclosures and particularly targeted loss of buffer clauses.
Thus, it has been clear for some time that rate hikes alone are not the solution and that ILS fund managers need to work on the quality of their portfolios, while maintaining the utility of their hedging for clients.
AM Best today published a new report on this phenomenon, stating that “the substantial losses of recent years have clearly shown that rising rates are not enough to improve the underwriting results of managers and ILS reinsurers”.
For this reason, AM Best states that “the ILS and reinsurance industries have focused negotiations on terms and conditions, restructuring coverage features such as adding per-event caps in aggregate coverages and increasing foreclosures and franchises.
“ILS fund managers are renewing underwriting and de-risking their portfolios as rate increases are no longer a panacea to improve underwriting results and satisfy finicky investors,” explained Emmanuel Modu, Managing Director, Insurance- Linked Securities, AM Best.
“Despite the losses, the ILS market remains attractive to investors due to its low correlation to broader capital markets, providing a valuable source of diversification,” added Wai Tang, Senior Director, Insurance-Linked Securities, AM Best. “However, investors are understandably fatigued by the poor performance of some ILS sectors.”
As reinsurance companies have moved away from some lower layers of risk, ILS funds have also declined and the result has been reduced risk throughout the industry’s value chain as primary insurers have also become more selective in their policies, to avoid any significant risk. concentrations, AM Best explained.
It has also opened up opportunities for those with strategies that can target lower level risks, and AM Best explained that “this mismatch between supply and demand for capital has led protection sellers to benefit from a preferential treatment from reinsurance brokers if they so wish. to provide coverage for the lower fixing layers.
But overall, ILS managers are taking advantage of improving prices and market conditions, with a focus on healthy re-underwriting and risk reduction to “rebuild ILS portfolios, with the potential to deliver their target returns but with lower volatility,” AM Best went on to explain in his report.
The shift in appetite for global coverage has also been well covered over the past twelve months, and this continues to be a factor that will affect future renewals.
The catastrophe bond market has benefited, as well-structured global protection against named risks remains available in the form of catastrophe bonds, both on a reinsurance and retrocession basis (as evidenced by the brand new catastrophe bond from Swiss Re here).
That rate hikes alone are no longer the answer to falling ILS fund yields is well understood and also has ramifications for end investors, as the timing of market entry simply because rate hardened is no longer a guarantee of best performance, as it really depends on the portfolio allocated to it and how the ILS manager has built and managed it over the past few years.
That’s why we see that the divergence in returns continues to be a trend, as loss events affect different ILS fund strategies to varying degrees, those that have taken the strongest line on the T&Cs and the re -subscription being probably the best positioned in many scenarios. .