(March 14, 2013) — Investors have caught on to insurance-linked securities (ILS), asset management and advisory firm Conning reports, and that uptick in demand is changing the reinsurance marketplace.
Securities now account for roughly 15% ($35 billion) of the global reinsurance market as whole, and that number is set rise, according to a report from the insurance specialty firm. ILS offer something nearly all major asset owners are chasing: returns that are uncorrelated to global equity markets.
“The insurance-linked securities market has become increasingly attractive to both investors and reinsurers,” said Steve Webersen, managing director at Conning. “Investors are attracted to these non-correlated diversifying investments and the historical returns the asset class has delivered. Reinsurers, meanwhile, have recognized that this market is here to stay, and are extending their business models to establish relationships with ILS funds and develop their own internal capabilities.”
Product proliferation has been one upshot of this increased demand, Webersen noted, with the range of securities on offer now extending far beyond catastrophe bonds. He pointed to collateralized reinsurance and sidecar markets, which first gathered steam in the aftermath of Hurricane Katrina.
Another probable consequence of ILS “going mainstream,” according to Conning, has not yet fully played out: downward pressure on pricing from increased demand, which would ultimately dampen returns.
“It is clear that the ups and downs of reinsurance pricing have dampened in recent years, and we believe that has much to do with the growth in alternative capital sources,” including institutional assets, the report states. Stephan Christiansen, director of research at Conning, projected that growth will continue: “We anticipate that as additional capital flows into the market, reinsurers and capital providers will experience pricing pressure. We also anticipate that insurance-linked securities will capture a growing share of reinsurance capacity.”
It’s likely not too late to get on the reinsurance wagon, however. Several asset management firms have recently cited the industry as good bet for investors who are looking to gain alpha and/or diversify. JP Morgan Asset Management, for instance, listed reinsurance as one of four hedge fund strategies best able to excel in a low interest rate environment.
It is worth noting that Conning’s characterization of ILS as “mainstream” only holds true in regions that have traditionally had something of an appetite for reinsurance investments. Europe, the United States, and Bermuda together accounted for 93% of catastrophe bond investors, according to a 2012 report from PricewaterhouseCoopers.
Of course, a broadening customer base would only hasten the arrival of the more crowded, lower-return ILS market that Conning projected.