Convergence 2.0 arrives as lines blur in ILS

The degree to which ILS funds and traditional reinsurers are blending is creating a situation where reinsurers are increasingly participating in the market while ILS investors are acquiring some of the characteristics of reinsurers including closer client relationships.

Bill Dubinsky, managing director, head of Insurance-Linked Securities (ILS) at Willis Capital Markets & Advisory, speaking ahead of the SIFMA Insurance and Risk Linked Securities Conference in New York this week, describes the dynamic as Convergence 2.0.

“What is interesting is the degree to which these funds and traditional reinsurers are blending and looking very similar,” said Dubinsky.

“Clients are finding that investors are trying to be more relationship oriented, despite having been historically more transactional. At the same time brokers have become comfortable with a modest shift towards a more transactional and less relationship oriented approach – which has to happen if they want to do the right thing by their clients.”

He continues: “The reinsurers themselves are managing funds and the ILS funds are running out and trying to develop relationships and direct reinsurance private placements, so you might call that convergence 2.0.”

However, despite the blurred lines, Dubinksy points out while offering an integrated service to their own clients, there is no conflict between Willis Re and the capital markets outfit, which he says work closely together.

“More often than not, we are working in concert with Willis Re to develop solutions for their clients,” he said.

New risks and a lack of supply are often talking points among investors, however, as Dubinksy explains, there are other areas that demand attention before introducing new ones.

“Investors want to see more supply, and I’m not 100 percent that I agree that this is the number one issue,” he said.

Dubinsky believes that an increase in products which would encourage direct investment from pension funds and life insurers would increase activity.

“There is still some reluctance with pension funds and life insurers to invest directly because they don’t feel qualified to manage their investments in house, so if we had products that were more amenable to that direct investment, we’d see more activity. Whether that would take the form of cat bonds, sidecars or ILS fund investments, it’s tough to say,” he said.

As the SIFMA conference begins, Dubinsky who has participated in more than 25 ILS transactions since 1997, and attends the event each year, says that the biggest talking point will be around pricing and which direction it may be heading, especially in the absence of many losses last year.

“2014 will be a bigger year for cat bonds, there’s a pretty vibrant pipeline and a lot of sponsors who have been active in the market are thinking about increasing their input. We’re also seeing new sponsors enter the market,” he said.

To read the full article in Intelligent Insurer’s supplement called ILS from all angles, look out for a copy at the SIFMA conference, or email john.walsh@newtonmedia.co.uk to obtain a digital version.