Q2: WHAT ARE YOU SEEING IN TERMS OF MARKET CONDITIONS AND RATES?
“The due diligence process has taken a little longer.”
Redcliffe: I would say that with the rate improvement, investors are seeing this as an opportunity that should provide some growth for the ILS sector too. It really depends on the perception of investors towards the rate improvement and whether it is sufficient to compensate them for their views of the risk.
Given some of the losses over the last few years and the perception of the losses being of an unmodelled nature, investors are asking more questions. The due diligence process has taken a little longer. Investors want to ensure that they understand the models, what’s included and what’s not included.
The other question investors are asking is how long this environment is going to last. Is this a short-term change or is it more of a cyclical change that will last a few years? Investors are asking questions, but we are certainly seeing an increase on the demand side.
“The other big challenge is social inflation and the impact on casualty.”
Libassi: There is a lot of investor distrust out there. To be blunt, most of us heard the same story in 2018 and rates never improved as everyone told them they would. That is on top of the trapped capital issue. The property sector is also difficult for investors. They do feel more comfortable with the rate increases, but it’s not just rate increases, it’s the tightening of terms and conditions which people forget to tell investors about. That is actually much more important than the rate increases.
We don’t think people are going to have more money to spend on reinsurance next year than they spent on buying reinsurance this year. The only way that is going to happen is through higher attachment levels, better terms and conditions, etc. Rates are likely to increase, but they may not go up to the 20 percent that a lot of people are signalling. The average may increase to 20 percent but the top line may not.
The other big challenge is social inflation and the impact on casualty. For example, funds have been raised to buy assignment of benefit claims and fund lawsuits against insurance companies in Florida. Unfortunately, we have probably not heard the end of challenges that surfaced back in 2017. That makes states like Florida more difficult and it’s one of the reasons you’re seeing a lot more investors interested in non-property asset classes.
Of course, that will be a challenge for Bermuda because it has been the centre of the property market for years, whether on the reinsurance side, traditional or alternative providers such as the ILS market. The situation will clearly change at some point, but that combined with climate change (another big focus among investors) means there is a bit of a wait-and-see attitude at the moment.
From our standpoint, we think this market is probably going to be one of the most attractive since the early 2000s. But terms and conditions are changing dramatically and that is more positive for the reinsurance industry than the rate changes.
“There will be another wave of innovation.”
Manning: In a nutshell, innovation is going to be very important for our industry. Yes, marginal rate improvements are coming, but bigger changes are also likely in the near future.
I think new asset classes will come to the market that are not cat-related—new regional exposures and new ways of bringing investments to the market that improve the overall liquidity profile of investors.
There will be another wave of innovation and the BSX is very well positioned to be a vehicle for more liquid opportunities.
Wojciechowski: Since we made the decision to enter the ILS space and asset class, it’s been our intention to provide exchange infrastructure that offers the support that is expected for any listed asset class such as price discovery, trading, clearing and settlement.
“Regulated markets are very important for instilling investor confidence.”
We knew early on that we wanted to work alongside the market and that we had a unique value proposition given our status as an internationally recognised stock exchange, but were very aware that migration to a regulated trading platform could not be forced and would happen in an organic fashion. We are also committed to providing our support and experience to the ongoing evolution of secondary market aspects of the asset class.
As a result, we will continue to position BSX and work with the ILS market so when conditions are right, we can offer regulated exchange infrastructure to the space—we have the same thought process in respect of the digital asset environment as well.
Regulated markets are very important for instilling investor confidence as they provide third party independent support to the secondary market price discovery mechanism as well as transaction settlement assurances.
“We are getting towards the end of phase 1 of the market’s development.”
Manning: Finding a more liquid way of repackaging ILS exposure for the benefit of investors is going to be one avenue through which we can effect growth in the sector. The other area is the expansion of what we do in this business. At the moment, I feel as though we are getting towards the end of phase 1 of the market’s development.
Some of the bigger players in ILS are talking about setting up rated vehicles through which to front their own transactions and thus help to eliminate some of the negative consequences, side-pocketing, capital trapping and so on.
As a business model, I find that very interesting. It’s one more avenue through which we may see a second wave of ILS: an expansion of the business and an expansion of investors’ interest.
Libassi: I agree that the creation of rated balance sheets is the future. The ability to expand beyond property, which is only 30 percent of our portfolio, is the future. I also think that creating vehicles (whether in the US, Europe, or Asia) and allowing investors multiple ways to access risk, is the future.
Our investors can now access primary insurance risk, the US and speciality risks. That is what they want and that is the opportunity for Bermuda—provided we have a fast, thoughtful regulatory environment, which is what the BMA has done to date.
But it is going to require changes in the way we view what a reinsurance company is. It’s clear what the next phase of ILS looks like, but it is going to require a favourable regulatory environment. And I think that is one of the big advantages Bermuda has over other jurisdictions.
“We have much more stable returns.”
Adderley: I totally agree with what you’re saying— rated reinsurance is the way to go but it’s no longer a collateralised product. That’s how to achieve flexibility with not as much trapped capital.
Bardon: I agree. ILS doesn’t have to be collateralised reinsurance, it’s just one way for investors to participate.
Libassi: Our philosophy is that we’d rather own it. We own managing general agents, and insurtech companies. We don’t talk about it, but we already own it. The vast majority of our profitability comes out of insurance now.
Bardon: Yes, that’s how we have been able to stabilise our results over the last few years. Other ILS funds that focused purely on property cat are seeking rate increases and telling investors to inject more capital. But what if they have another larger-than-average cat year?
Because we are diversified, not just outside cat but also outside collateralised reinsurance, we have much more stable returns—and that has been attractive to investors.
“For some investors, it is simply a property cat play.”
Hughes: I agree, everything that’s old is new again. Is it ILS? Who knows? Is it reinsurance 2.0? When managers form own-rated fronts, they don’t have the legacy, so they are able to do it more efficiently and cheaply— and that’s part of the problem. The traditional reinsurance market has legacy issues.
For some investors, it is simply a property cat play—that’s the non-correlation they’re after. Meanwhile, others are interested in moving into different risk areas. Of course, once you get into those other risk areas, you get into issues around valuation and trapped capital. That is a big thing.
It comes back to transparency. Investors say ‘you’ve got to tell us’.
We have some investors who are actually quite comfortable with that. They’re long-term allocators and they get it. Others, however, are definitely looking for a solution. The securitisation created a lot of interest, but if you did have a thriving secondary market that is really going to change things a lot.
Libassi: What 2017 and 2018 showed was that the concept of property having a short tail is no longer true. When we started in marine in 2014 and 2015, people said the tail was too long. But our tail is shorter than the property sector’s. We would love to figure out a way to get into the casualty market, but I agree that the tail is too long.
But the property tail is five years—it’s not 12 months, which is what everyone thought. As soon as you accept the fact that the average life is 24 months-plus, that opens up a much bigger universe. And as soon as you begin to convince investors and explain what return they can expect after 24 months that changes everyone’s view of the asset class.
Bardon: It’s true, some investors are longer-term and that allows you to start doing things in auto, cyber and other shorter-tail casualty lines. In terms of a secondary market, if you were able to sell off, securitise or commute back the tail to the cedant, that could help expansion into the medium/longer tail lines of business.
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