When Peak Re first ventured into the insurance-linked securities (ILS) market in 2018, it was something of a pioneer: Lion Rock Re represented the first reinsurance sidecar from an Asia-based sponsor.
According to chief executive officer Franz Josef Hahn, ILS has since become an integral part of Peak Re’s retrocession strategy, with Lion Rock Re at its core. The fully collateralised reinsurance sidecar was renewed in February 2021 for the third time at $107 million, up more than one third on $77 million in 2020.
To discuss the sidecar and Peak Re’s strategy, Hahn joined Intelligent Insurer’s Re/insurance Lounge, the online, on-demand platform for weekly interviews and panel discussions with leading players in the market.
Asia comes of age
As Hahn explained, the sidecar provides Peak Re with an alternative to its own balance sheet and the catastrophe retro that protects its cat book. While it broke new ground in the Asian market when Peak Re first launched the sidecar in 2018, that wasn’t the main point.
“We aspired to be the first to issue a sidecar, not in competition with anybody else but much more for ourselves, to have the flexibility for our own risk capital management,” he said.
Nevertheless, it is a sign of the changing environment in the region. While ILS, cat bonds and sidecars were found in Asia in the past, it was mainly in Japan and for cat risks. Beyond that, the market had been heavily concentrated in North America, with some activity around European windstorm risks.
This reflects the development of the Asian market in reinsurance overall.
“We’ve seen an increase in the aggregates being placed into the reinsurance market in Asia (emerging Asia specifically) with China in the forefront, followed by India,” he explained. That has happened over the last two or three decades, but only in the last decade or so has there been sufficient capacity to place ILS efficiently.
“It is also, of course, always difficult to be the first,” he added.
A more difficult journey
After launching the sidecar, the increase in the most recent renewal is another major victory. It was, however, harder won than in previous years.
“The renewal was completely different from that of the two previous years,” he said. “For the first time, we saw the impact of a series of natural catastrophes starting with hurricanes Harvey, Irma and Maria and followed by two consecutive years of very severe typhoons in Japan with Dorian and Enzo. Consequently, we have seen a contraction in the capital markets.”
At the same time, there has been a shift in the structures that investors prefer. From 2019 to 2020, Aon Securities reported a contraction in the sidecar market from $8.2 billion to $6.8 billion. Cat bonds, however, remained resilient and even grew.
“It shows that investor appetite is shifting very rapidly into the cat bond area again because it’s cleaner, more straightforward, liquid and has excess loss protection. With sidecars, it really depends on the underwriting,” said Hahn.
“With sidecars, it really depends on the underwriting.”
Franz Josef Hahn, Peak Re
In that context, the $30 million increase Lion Re achieved reflects the confidence of existing and new investors in the underwriting and the diversification that the vehicle offers.
“As well as our Asian risk, we also place our North American and European risk. That kind of diversity and portfolio mix is quite unique, and that’s why we could uplift it,” explained Hahn. It ensured that the sidecar was a success, but the experience also provided food for thought.
“We hear what’s going on with the cat bond markets, and we will certainly learn our lesson out of this as well,” he added.
Longer-term, Hahn has little doubt that sidecars will see continued growth in Asia, along with the rest of the ILS market; indeed, the Lion Re renewal follows Peak Re’s acquisition of a Bermuda-based ILS asset manager (rebranded as Peak Capital) in May 2020.
That confidence is based mainly on the expanding depth and breadth of the market. On one hand, a growing middle class, particularly in China, is seeing the insurance market grow 15 to 20 percent each year, and the consequent need for reinsurance is growing even faster.
“The middle class is already big, but if you take just the Asian emerging markets’ middle class, it’s growing by about 500 to 600 million people per annum. And access to insurance is much better than it has been in the past,” said Hahn. Moreover, many of those people are based in territories with significant exposure to natural catastrophes.
At the same time, the applications of ILS are expanding, with parametric triggers and lone farmer insurance in India, for example.
“It shows that natural catastrophes aren’t the only area for ILS or cat bonds,” he added. There will also be other opportunities driven by public/private sector development.
“In the future, governments will often be the buyers of protection. We’ve seen that with cat bond protections in the Caribbean and Mexico, and in Istanbul with earthquake protection,” he said.
Nearer to home for Peak Re, Hong Kong and the Greater Bay Area remain heavily exposed to typhoons. Elsewhere, there are the manufacturing and industrial centres around Shanghai, Beijing, Tianjin, and Dalian.
“These centres will increasingly demand the kind of protection that goes beyond what insurance and reinsurance companies can do. It’s a fantastic area, and we are working on it already,” said Hahn. “I’m certain it will come.”
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Image courtesy of Shutterstock / Porojnicu Stelian