ILS capacity demystified for US cedants
Most US cedants increasingly see using collateralised capacity as a mainstream option complementing their traditional reinsurance programmes—but education is still needed to help demystify the process for some carriers.
That is the view of Jutta Kath, chief operating officer of Secquaero Advisors, the fund manager 50.1 percent-owned by Schroders and its exclusive advisor on insurance-linked securities (ILS) investment strategies.
Kath said she spends a large amount of time with US cedants at PCI—some existing clients of Secquaero, others potential clients. She said that the use of ILS structures is far more mainstream than it once was although there remains an extra level of questions that she helps educate them on.
“The psychology has changed although there is still something of an education process we go through,” Kath told PCI Today.
“It is not complex, it just needs demystifying. The only difference between what we offer versus traditional reinsurers is that their capital is permanent and ours is temporary. As such, we use a trust fund to hold collateral.
“We sometimes have discussions on the trust fund and how that works but the nature of the reinsurance treaty is still the same. Sometimes traditional carriers like to question the ILS market’s mentality when it comes to paying claims, but that is inaccurate.
“The cedant has access to the fund—if there is proof of loss the money is there for them very quickly.”
Kath added that the role of the broker is essential in the relationship with cedants and she notes that US brokers in particular are now very sophisticated in their understanding of collateralised capacity and the choice this can offer cedants.
“From a broker’s perspective they understand that they need to offer their clients a full choice of options and that now includes ILS capacity,” she said.
“They have a professional obligation to explore the whole market for their clients—maybe there is a step further to go in terms of education but it allows them to offer their clients a different source of capital.”
She said some brokers in Europe question why they need to offer ILS capital to clients as they “have plenty of choice already”. But, she said: “That choice was only traditional reinsurance so that is not really offering clients the full spectrum of what is available,” adding that such a mentality is now rare in the US in particular.
In terms of rates moving into the 1/1 renewal, Kath said that it is too early to say whether increases will eventuate in the aftermath of the hurricane losses. She said many investors are waiting in the wings, ready to move if improvements happen.
“We could know more after PCI,” she said. “We usually see more concrete submissions after this event so we will see. At the moment talk of rate increases is speculative and potentially just wishful thinking.”
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