ILS investor focus on returns can support reinsurance pricing: Moody’s

Rating agency Moody’s Investors Service said this morning that while there are multiple factors driving up reinsurance pricing, one of them is the increased focus on returns in the insurance-linked securities (ILS) investor and ILS manager community.

Achieving sustainable and positive returns over the long-term has always been the goal of the ILS investor and manager, but in recent years the softening of reinsurance has meant that there has been little in the way of margin or return to be earned, when catastrophe losses have been elevated.

Moody’s explained that a “reassessment of catastrophe risk” has been underway in the reinsurance industry, causing some to pull-back, while others have sought higher pricing.

While inflows to the ILS market, to catastrophe bonds, private ILS and other collateralised reinsurance strategies, had stagnated over recent years, the new and higher return environment could be just what is required to encourage new capital into the space.

“Capital trapped in collateralized reinsurance vehicles, together with the reluctance of some ILS investors to reinvest following successive losses, has led to greater focus on risk adjusted returns, which also supports reinsurance pricing,” Moody’s explained.

This is just one of the factor’s, alongside it are the level of catastrophe losses experienced, the nervousness over secondary perils, the fact retrocession capacity is still limited, while the traditional reinsurance market has also faced a capital decline, all occurring at the same time as elevated levels of financial and social inflation, Moody’s said.

The rating agency now feels that, “The combination of price rises, higher policy attachment points, tighter terms and conditions and restricted aggregate coverages should reduce underwriting volatility and support a much needed improvement in the sector’s return on capital.”

That reads across positively for ILS strategies as well, which should in-turn benefit from the elevated return ambitions of the reinsurance market.

With reinsurance prices now at multi-year highs, Moody’s expects underwriting margins will be boosted across the sector.

However, we’d suggest the sustainability of pricing is going to be key for capital to be attracted to the sector long-term and to remain sticky within it this time around.