ILS market resilient for 2022, with innovations in the pipeline: Fitch
Amid the turmoil of the COVID-19 pandemic, rising interest rates, and the war in Ukraine, the insurance-linked securities (ILS) sector has held up well when compared to other asset classes, says Jeff Mohrenweiser (pictured), senior director at Fitch Ratings.
“We’ve seen other asset classes, such as bond funds and equity funds, lose double-digit values, but the ILS market fund managers have eked out a small gain or broken even, so it speaks to the diversification benefit of ILS funds,” he told Intelligent Insurer.
However, he sounded a note of caution: “We have to keep in mind that during this time, we’re running into the teeth of hurricane season, so this good performance could make a U-turn.”
Mohrenweiser said that amid the impact of the pandemic and the war in Ukraine, there have been record issuances in ILS, with nearly $8 billion issued in H1.
“This puts it on mark for the third highest issuance in history, so the market is ploughing forward,” he said. “That’s a healthy sign that it’s been able to retain capital.”
He noted, however, that investors are demanding an adequate risk premium for deals and in certain instances pulling back capacity.
“They’re cognisant of what’s happening in the Florida market with court cases, claim litigations, rising costs and so forth,” he said. “Investors are being more demanding and they’re willing to step away from deals if they feel they’re not being properly compensated.”
In the face of higher inflation, Mohrenweiser sees ILS investors as still in a position to benefit, or at least hold steady:
“Rising inflation will impact claim costs, and if there is an event, you might see higher claim payments coming through,” he said. “But on the flipside, the assets that are normally invested or used for ILS tend to be tied to something short-term, so interest rates will go up, and the coupon or the risk spread to investors will also increase accordingly.”
On the shift from traditional reinsurance capital to ILS, he noted that there is an ebb and flow in both sectors.
“If you experience enough pain, you start pulling back capacity and tightening up those terms and conditions. Florida hurricane is still top of mind, so you might see some pullback; I think we’ll see the traditional markets pull back a little bit more,” Mohrenweiser explained.
“But similarly, we’ve seen deals heavily focused on Florida that have not been placed in the ILS space, so I think the ILS market has sharpened its underwriting pencil, and they’re being judicious about making the right return for the risk they’re taking.”
