Time for a change

Aon Benfield Securities predicts that $100 billion of new alternative capacity will enter the insurance-linked securities (ILS) market over the next five years—a figure that demonstrates the growing demand within the sector.

As supply and demand continue to flourish, the evident reshaping of the reinsurance sector can be aligned with the maturity of the ILS market.

“The first half of the year saw some interesting deals come to the market,” says Paul Schultz, CEO at Aon Benfield Securities, giving the Allstate deals as an example.

Allstate issued two bonds—one of its own and one through subsidiaries Castle Key Insurance and Castle Key Indemnity—in close succession. The bonds, which accounted for $750 million and $200 million respectively, were an example of the growing trust that is being seen throughout the ILS sector.

“That a client can bring nearly a billion dollars to the ILS market shows that the market can now in the normal course of business provide significant capacity, and to have two of these data points, when you include the Everglades transaction, really shows the maturation of the market,” says Schultz.

Generali’s introduction of the first large Europe Ultimate Net Loss (UNL) transaction further demonstrated the market’s evolution from indexed and parametric based transactions (turn to page 4 to read more on the insurer’s involvement in the ILS space).

“This development which shows a form that clients are most comfortable buying is a very significant point,” says Schultz.

Other significant developments such as the first yen transaction via Sompo’s Aozora Re and the willingness to explore longer term bonds, are also playing an essential role in the market’s growth.

A shifting dynamic

As the 2015 renewals creep closer and delegates prepare for the Rendez-Vous de Septembre (RVS), it is certain that talks will take a different course this year.

“I think clients are more aware of the alternatives that they have in the marketplace when purchasing catastrophe reinsurance. So from a client’s perspective, that’s very helpful as when they think about the best reinsurance programmes for their company, now they have options which are proven readily available, and so the dialogue around the structure of the programme is much more accurate than it ever has been,” explains Schultz.

“They’re not simply getting together in Monte Carlo and saying ‘how am I going to renew my traditional programme?’. Now they’re asking ‘what’s the best reinsurance programme for me?’.”

Schultz says that the dialogue around this is happening with greater frequency and that there is greater confidence in executing deals.

“The fact that we’ve shortened the issuance timeline to something that is between six to eight weeks fits better within a renewal cycle. There’s a lot of positive developments and clients are now thinking about how to best shape their reinsurance programme,” he says.

While Q1 and Q2 saw record levels of issuance, Q3 and Q4 promise to be active, with a pipeline of transactions already in waiting.

“It’s difficult to say whether the first two quarters will be busier that the third and fourth, as what’s in the pipeline at the moment feels a little lighter than it was last year, but there’s still time for things to come together,” says Schultz.

“Not every transaction that came to market in Q2 was known about a long time in advance; some of those transactions came together in Q1, so it’s very possible and likely that throughout the rest of Q3, we will have discussions about Q4 issuance.”