New ILS capital is needed: Schroders’ Lohmann
An improvement in pricing levels in the reinsurance sector resulting in expected returns that meet or exceed long-term target returns for investors has started to lure investors back into the space. But, after a long period of the industry not earning an adequate return on capital, the process slow.
That was the perspective of Dirk Lohmann, chairman of Schroders Capital ILS, speaking in a recent interview with Intelligent Insurer at its recent Re/insurance Outlook Europe 2023 conference in Zurich. The full interview with Lohmann can be viewed here.
Lohmann highlighted that, historically, reinsurance pricing has been around 700 to 900 basis points over long-term government rates, equating to returns of 12 to 14 percent. These attractive returns are being seen in the cat sector again, leading to some capital flowing back into the industry.
But more is needed. Lohmann emphasised that the industry requires more capital to address the existing gaps in coverage: while government support plays a role, private market solutions represent a key contribution to capital, but with required returns.
The need for capital is further driven by high inflation and the continuous growth in insured property values, which increase by approximately 12 to 14 percent each year due to building cost inflation. Lohmann expects this demand for capital to persist in the foreseeable future.
Regarding the sources of capital, he noted that while full startups were common in the past, the experience of private equity investors in some previous years was not always successful, with a number of startups failing to reach the initial public offering stage. The introduction of other vehicles, such as sidecars, changed the way capital enters the industry. He noted that there have been new startups and sidecars but fewer than in previous market cycles.
Different risks
Lohmann also discussed the types of risk the ILS market is currently facing. Existing risks, such as catastrophe risk, have seen significant growth in demand. The market is open to new risks that bring diversification, but they need to be structured in a way that allows for the proper valuation of the instrument within a short timeframe. Long-tail risks, unless structured as whole-of-account stop-loss structures, present challenges.
