Capital may trickle to ILS market, but flows still pinched off

Capital may trickle onto reinsurance and ILS markets in 2023 amid hard market conditions in property cat, but won’t soon flood the zone in any way similar to what has followed prior hard market cycles, key industry leaders told an  AM Best webinar.

Prior post-catastrophe hard markets in property have brought on a deluge of new entrants and fresh money. But those reactionary capacity floods have come against radically different backdrops than the market sees in 2023, the president of pure play property cat reinsurer Aeolus Capital Management, Aditya Dutt, said.

This time around, investors may be understandably sceptical if current prices are the real thing given the industry’s five-year history of nickel and dime price discovery towards an ever-elusive price adequacy.

“Until we settle on price and an adequate return, it is difficult for investors, whether they are traditional or ILS investors, to commit,” Dutt said. ROE at half the cost of capital over recent years won’t draw anyone.

“It’s hard to understand the underlying risk they are accepting and if it is hard to accept the underlying risk they're accepting, it is hard to price it. If the industry is constantly changing and engaging in price discovery, that becomes a difficult process.”

The current five-year string of elevated nat cats has added layers of difficulty to the investor calculus. And asking investors for money just as the world’s central banks turn off the taps for the first time in 121 years doesn’t make it easier.

“It is hesitant capital that is coming in,” the CEO of Somers Re, Liz Cunningham, summed.

But the 1.1 renewals did give the single strongest pricing impetus to investors in what the consensus is no calling a generation, what Dutt called a “market turning event of great significance.”

“Taking the currently priced risk in property cat exposure makes sense and I think there is a need for property capacity,” Cunningham said.

But new capital would not necessarily flood so specifically into the property cat zone, she said. Pure-play property cat price grabbers are a thing of the past. “Doesn’t make sense to do that,” Cunningham said of the current market. “Diversification is important.”

AM Best senior director AM Best senior director Carlos Wong-Fupuy concurs. Some capital may sniff around following the continued hardening of the market and the outlook for further rate gain through mid-year. “But experience tells us that it is very unlikely that it is going to be a flood of capital as we saw in previous cycles - most likely it is going to be something very specific and much more diversified than exclusively a property cat venture.”

Despite talk of a capacity shortfall going into 1.1 and the lungful look towards capital markets, AM Best notes that capital remains aplenty amongst existing reinsurers. Only the willingness to deploy has altered.

“We don’t see a shortage of capital,” AM Best senior director Carlos Wong-Fupuy told the webinar. “The question has been more about how companies would deploy that capital.”

That the 1.1 renewals got done might testify as much to primaries finally resigning from excessive coverage as it does to reinsurers under the pinch.

“There was an excess of reinsurance capacity that had to be deployed [and] was deployed on layers that shouldn't have been ... the primary sector got used to that,” Wong-Fupuy said. “We are seeing that adjustment happening now.”

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