Increasingly savvy ILS investors will reload
The insurance-linked securities (ILS) market has evolved quickly in recent years with its investors becoming vastly more sophisticated—which their reaction to the recent hurricane losses has proved, according to Richard Lowther, chief operating officer at Hiscox Re ILS.
Asked about the current state of the ILS market, Lowther told PCI Today: “ILS has evolved beyond cat bonds and is now a significant source of capacity in the private reinsurance market. Part of this has been driven by an evolution in investor sophistication as their understanding of the asset class has grown.”
In the wake of what has been the busiest hurricane season since 2005, with four hurricanes making landfall in the US this year, Lowther was positive when asked if the market has been affected by the recent hurricane activity.
The sophistication of ILS investors is being borne out by their response to the significant loss activity in 2017, he said.
According to Lowther, investors are responding sensibly to the recent storm activity, claiming that they are looking to gain an understanding of the impact on their portfolios and how their ILS managers performed relative to expected outcomes.
“As a major participant in the reinsurance and retrocession markets, ILS will have its fair share of industry losses but will still pay claims and provide stable capacity,” Lowther said. “However, one issue will be the amount of trapped capital as collateralised reinsurance and retro programmes hold capital to fund potentially adverse loss development.”
He added that going forward he expects ILS to demonstrate that it is stable capacity and that most investors will reload or even expand committed capital.
Despite this positive view Lowther has a caveat: “2017 is shaping up to be one of largest aggregate loss years on record and all capital providers will be looking to trade into a rate environment that reflects the magnitude of losses.”
Hiscox Re ILS was launched by Hiscox in 2014 in recognition of the long-term nature of alternative capital in the re/insurance markets. Such capital brings benefits to Hiscox’s re/insurance clients and long term institutional investors seeking access to low correlating re/insurance risk.
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