Terms to hold longer than price. Don’t expect a reversion to 2017

Having recently spent time meeting with the insurance-linked securities (ILS) market at the SIFMA annual conference in March and caught up with other market participants since, we come away with a feeling that the ILS market remains keenly focused on holding onto gains made in recent years, with no ambition to revert back to the market softness seen up to 2017.

We met with specialist ILS investment managers, multi-asset class fund managers, large institutional end-investors, fixed income specialists, broker dealers, cedents and other market facilitators.

There is a somewhat reluctant acknowledgement that ILS and reinsurance returns will remain supply and demand driven, which we’re seeing clear evidence of this year in the way catastrophe bond pricing has softened off from its peak and cat reinsurance too.

But, encouragingly, no one at all that we have spoken with said they expect price or terms will revert back to anything like as soft as seen in the past.

Most are begrudgingly accepting that rates were always going to come off the highs they had hit in 2023.

In fact, some of our contacts felt the market had hardened too much overall and that, when you factored in the updates to terms alongside the price increases won, the market should be glad it managed to sustain this level for as long as it had.

Capital has a cost attached and that capital wants to cover its loss costs, cost-of-capital and expenses over the longer-term, but many we spoke with feel that is still eminently achievable, even after the recent months moderation in pricing.

Moderation of terms though is a more controversial topic.

Some stated that the new attachment points, terms and conditions should be seen as the standard for risk sharing between primary, reinsurance and retrocession tiers of the market.

They believe what is needed is more capital to come in, with an appetite for the lower-layers at these improved terms, to take off some of the pressure cedents and sponsors are feeling.

Time is still needed to demonstrate to capital providers that changes to attachments and terms can prove stickier this time around, most agree. But, there is also an understanding that some investors are getting close to feeling sufficiently comfortable to deploy more funds again and capital raising discussions are continuing apace across the industry.

Even brokers seem accepting of the fact they won’t be able to persuade capital to become as freely deployable as it had become in the past.

They acknowledge some give and take is needed though, to help cedents and sponsors in achieving the protection towers they need to buy.

One reinsurance broker said the fact cedents went through 2023 with some gaps in their towers reflected badly on both the traditional and capital markets.

They explained that they hope to see more accommodation coming from the capital side, to ensure that what has been given back through term and attachment updates, is being supported through capital that has an appropriate risk appetite to enable most buyers to at least come away satisfied this year.

Aggregate coverage remains a difficult topic for many, but even here there is evidence from 2023 of how better structures and higher event deductibles, played into the allocation of losses between cedents and their reinsurance providers.

We understand there is more appetite coming back for deploying capital to support aggregate limits, but that capital providers have very strict criteria for deals they will support.

Another topic of discussion in recent weeks has been ensuring capital is compensated in some way when it is being held and that buffer loss tables are constructed in such a way as to be more equitable, ensuring cedents benefit from the certainty they need that capital is going to be there, but that its providers feel more fairly dealt with than they had a few years ago.

Not a single person we have spoken with believes that a soft market will ever see the loose terms repeated that had been in play, back in 2017 and prior.

With rumours starting to emerge of some potentially meaningful capital entry to reinsurance over the coming months, both in ILS and traditional equity forms, it’s going to be interesting to see how disciplined the market can be.

Right now the determination, not to go back to the loose terms and low pricing of the past, remains strong. But, we all know what can happen when competition heats up, don’t we?

It’s worth also noting that demand can be a balancing and moderating factor here and with many large cedents needing more reinsurance, that could be the way reinsurance capital can clearly demonstrate its support for counterparties, while deploying some of the excess that is building and is expected to continue doing so.

Can the predictions for a very-to-hyperactive Atlantic hurricane season also be another moderating factor?

It’s possible, as nobody (ILS manager or reinsurer) wants to be seen to let discipline slip right before what could be a period with a more active threat of losses.