Stable, healthy reinsurance may persist longer than previous cycles: Twelve Capital’s Grandi

Marcel Grandi, Head of ILS Sourcing at Zurich-headquartered insurance-linked securities (ILS), catastrophe bond and reinsurance investment manager Twelve Capital, believes the current reinsurance market environment and its pricing may persist longer this time.

In a recent interview, around the 2024 Monte Carlo Reinsurance Rendez-vous event, Marcel Grandi of Twelve Capital told Artemis that he has more confidence in the harder cycle being sustained.

Explaining some of the recent backdrop to the market environment, Grandi said, “ILS markets benefitted from a record high rate environment over the last two years for both collateralized re as well as cat bonds.

“The active wind season forecasts which motivated an increase in buying demand dampened pressure on rates during the year. In fact, cat bonds and in particular Insurance linked Warranties experienced a more dynamic upward price development in the first half of the year and in particular shortly ahead of the start of hurricane season also offering opportunistic opportunities.”

Grandi also discussed the loss environment, noting that after the reset in reinsurance pricing and terms that occurred through the last few years of renewals, the ILS sector has been better able to manage its exposure to frequency and severity.

Grandi said, “In the absence of large sized catastrophe events so far, the trend for elevated insured nat cat losses continued in the first half of 2024. Insured losses from severe thunderstorms in the US were again the main source contributing to over USD 40bn of the total insured losses of more than USD 60bn worldwide (the usually more loss intensive second half of the year yet outstanding).

“However, the impact to reinsurers was limited and the retro as well as ILS markets were not affected.”

Going on to say, “The structural enhancements achieved in the last years’ renewals as elevated general retentions, limitations of the scope of coverage, clear definitions of the covered natural perils, high event deductibles (in the case of aggregate structures) are helping the ILS markets to manage the apparent trend of an increased frequency and severity of secondary perils as thunderstorms, wildfires or floods.”

Grandi went on to highlight the issue of climate change, saying this will be one of the ongoing challenges for ILS managers.

He explained, “The management of the effects of climate change in ILS structures remains a core priority. Considering the loss trend in secondary perils which continued in 2024 the question of the insurability of certain secondary perils remains.

“This includes a closer look into the modelling quality for certain secondary perils as well as possible structural and contractual adjustments to mitigate unwanted secondary peril exposure.”

While that suggests continued work is needed to maintain the appropriate level of risk-sharing, between primary, reinsurance and retrocession sides of capital provision, Grandi believes gains made through adjustments tocontract terms can prove more sticky this time.

At Twelve Capital, the opinion is that these conditions for deploying capital to reinsurance opportunities can be sustained for longer.

“We are anticipating the stable and healthy reinsurance cycle to continue possibly for longer than previous cycles where peaks lasted for around two years before rate erosion started,” Grandi told us.

Explaining that, “With around USD 105bn to 110 bn of alternative capital outstanding the growth of alternative capacity has been limited recently with a healthy match of supply and demand.

“The outlook for ILS investors remains positive.”

Read all of our interviews with ILS market and reinsurance sector professionals here.