The road ahead

Predicting how a market will change in the future is a challenge for anyone involved in re/insurance. Given the number of mergers and acquisitions, as well as other events, over the course of 2015, some people might be a little nervous about getting out their crystal ball and trying to forecast where the road ahead will take us. Darren Redhead, CEO of Kinesis Capital Management, believes further changes in the market will be an evolution.

“Over the next year, in my view, the market will continue to evolve in a similar fashion to that we have seen over the previous 12 to 24 months. What I mean by evolution is third party capital vehicle and fund structures changing slightly, with some of these entities pursuing rated carrier options. Some who were previously collateralised-only participants are also writing risk on a traditional basis, in what I call the ‘promise to pay’ market. “So I continue to see evolution like that, and along the ACE-BlackRock model [which resulted in the creation of ABR Re].”

The past year has also seen a number of new products and other innovations in the ILS market, with the property-catastrophe section of the market experiencing a surge in numbers and, according to Redhead, there is still interest in the market from investors both old and new.

“Have we reached saturation point in the property-cat world? I don’t think so. There’s still the appetite, but certain investors are saying that the margins are a bit thin for them and they’re reducing, while other investors are still coming in. If we see some losses, in my view while some investors might pull out due to the market being not quite what they expected, I think you may have more than the number who leave coming back in.

“Looking at consolidation of the market—it’s a distinct possibility. You’ve got three or four business models, if you look at the top 10 funds I think that nine of them are independent and only one of them is aligned. It wouldn’t be a surprise if some of those funds did become aligned with traditional carriers. As for these entities actually merging with each other, I think that’s not impossible but less likely.

“And then you have the other funds, who are aligned with the carrier, and also the newer type—the ACE-BlackRock model—which go off on a different direction. I think we’ll just continue to see this natural evolution. I can’t think of anyone who’s not evolving at the moment. The whole market is looking at ways of getting closer to the original business.”

2015 is the 10th anniversary of some of the worst hurricane losses the industry can remember: 2005 was the year of Katrina, Rita and Wilma, storms that hit the shores of the US and then the balance sheets of insurers around the world. Over the past decade insurers of all kinds have learned many lessons from these storms, including the fact that they can happen when they are least expected. Would a similar event affect the ILS market?

“Depending on where in the world it was, it would probably take something as big or even bigger than 2005 to seriously impact the market,” says Redhead. “It would have to be a $70 billion-plus event to really cause a dramatic impact within the collateralised world. The alternative collateralised world is now $60 billion-odd of capital, so to have an impact on that it’s got to be at that scale.

“The majority of investors understand the risks so although there might be a few surprises and you might lose 20 to 30 percent of the current investor base, I think you’d get a multiple of that number wanting to come in because they’d be attracted by the increased pricing.

“That said, I think that the cycle would be much quicker, in that where prices a decade ago stayed at a high level for two or three years, now pricing may reduce again more quickly. There’s so much money waiting to come in quickly that the classic supply and demand factor means that you’re going to negate the shortage of capacity.

“The cycle will speed up after losses. As an industry someone’s pressed the fast-forward button, and we’re evolving much more quickly than we have at any time in the previous decade.”