More funds will seek rated paper: Aon

Despite some of the recent challenges they have faced, insurance-linked securities (ILS) investors are not going anywhere soon, and they will form increasingly deep and complex relationships with the industry, Mike Van Slooten, head of market analysis at Aon, told Monte Carlo Today.

He said that many investors had been hit by a catalogue of bad news in recent years including heavy cat losses, trapped capital and loss creep on cat events. Some have questioned the credibility of risk models and many are asking pertinent questions about climate change.

But the non-correlated nature of the asset class means that investors remain drawn to it despite some of these challenges, Van Slooten said.

“Yes, a lot of investors have paused for thought but there is still a lot of capital on the sidelines that could move in quickly,” he said.

Much could depend on the rest of the year’s hurricane season, he added.

“Hurricane Dorian was a near-miss for the industry. If investors end up with three years’ worth of losses or more trapped capital, that would make their response pretty interesting,” he said.

“If, on the other hand, we get nothing now until year end and trapped capital is released, we could see their appetite increase and move into even more areas.”

Van Slooten noted that a number of ILS funds are now pondering the move to creating a rated balance sheet reinsurer. He said this could work in a number of ways, but could effectively simply operate as a way of transferring the risk on to capital markets investors via a 100 percent quota share retrocessional deal.

“For the buyer, it offers them something they are familiar with in the form of a rated counterparty; what happens behind the scenes is irrelevant to them but if another risk transfer is taking place that makes it more efficient, that can work for both parties,” he explained.

“It is a way of achieving the best of both worlds—maximum access to business at a low cost of capital.”