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Investor optimism remains strong for catastrophe bonds and reinsurance sidecars, but when it comes to collateralized reinsurance that optimism still lags, but institutional investors are positively working to address issues that have made allocating fresh capital more of a challenge in private ILS and collateralized reinsurance, according to Artex.
Overall, the Artex View on alternative capital markets in reinsurance is positive, but the service provider does still see hesitance among institutional investors when it comes to allocating to private collateralized reinsurance deals and certain structures within the insurance-linked securities (ILS) space.
Long-term sustainability of ILS investor relationships is a focus among sponsors and those delivering partner capital solutions, being prioritised over short-term gains, Artex explained in its latest report.
“An influx of capital into cat bonds and sidecars suggests investor optimism remains strong around these products,” the company said.
But also noted that, “Long-term growth may require additional innovations, such as parental guarantees, to draw in institutional investors and improve returns.”
Investors whose experience of ILS investing is maturing are “looking to go to the next level,” while there is growing interest from hedge funds and private equity investors in differentiated ways to access reinsurance-linked returns, which presents a current opportunity for the ILS sector, Artex believes.
“While the ILS market in Bermuda had a successful year in 2023, the sector is focused on building a sustainable market that will convince investors of its ability to generate consistent returns over the longer term.
“The efforts of portfolio managers to course-correct on attachment points and terms and conditions show their willingness to adapt and move towards sustainability. Nonetheless, some investors still view the private market sector with some caution and are conservative in their approach, with lingering concerns about uncertainty and volatility in the private ILS market,” Artex’s report states.
Scott Cobon, Managing Director, Insurance Management Services, Artex Capital Solutions, further explained that, “Institutional investors, particularly pension funds, are generally hesitant about allocating further in this asset class due to lingering structural limitations.
“However, there is interest in solutions, such as contingent capital structures, and we are working to solve the broader problems of trapped collateral by leveraging our size and diversification of client base with innovative products.”
The willingness of institutional investors to address structural risks indicates their recovering appetite for the private ILS and collateralized reinsurance market, Artex believes.
The company added that, on institutional investors, “Their involvement is entering a new phase, where they are seeking to evolve the way they deploy capital.”
Growing appetite is being seen for casualty collateralized reinsurance opportunities, with MGA’s looking to the capital markets for new sources of efficient capacity.
On this area of future ILS growth Artex says, “The need for accurate, real-time data to give investors comfort around casualty risk and duration is challenged by the industry’s typical cycle of quarterly reporting. However, at Artex we are optimistic that there will be a shift over time of capital flows to casualty.”
Diversification is also driving more interest in ILS investment opportunities into the Lloyd’s market, with specialty and casualty risks also being sought out through that venue.
At the same time, the private quota share and industry-loss warranty (ILW) segments are also seeing increasing ILS investor interest, Artex says, with these also helping investors diversify into different segments of insurance.
Kathleen Faries, CEO of Artex Capital Solutions, further stated, “This market is undergoing a reset. We don’t expect terms and conditions to soften, and while there might be some softening of pricing, I believe there’s a strong commitment to maintaining discipline around a sustainable overall return on risk.”
The companies new report goes on to say, “At Artex, we are hopeful that underwriting discipline will continue and ILS investors will regain full confidence in the sector’s ability to perform and deliver acceptable returns over the long term. We anticipate that discipline on pricing will flex first, with attachment points and terms and conditions likely to hold firm for the most part for at least another 12 months.”
Concluding, “The market is becoming more sophisticated and potentially more complex as investors are maturing and looking to take their participation to the next level. The industry will need to continue innovating and exploring new opportunities and alternative structures to ensure the continued growth and success of the ILS market.”
English (US) ·