ILS funds consider rated paper to try and solve trapped capital issues: ILS Capital

More insurance-linked securities (ILS) funds are exploring the possibility of forming rated reinsurers to give them more flexibility to offer investors a greater variety of investment options, said John Warwick, managing director and partner at ILS Capital.

The Bermuda ILS manager has openly discussed that it is exploring the possibility with the Bermuda regulator.

“The model of a balance sheet reinsurer does offer more flexibility and avoids pitfalls such as trapped capital,” Warwick said. “For this reason, many other funds are now looking at this possibility.”

He said that this would also help overcome another perennial problem that funds face: having capital at their disposal that they cannot use. He said that last year’s renewals were very late, and a number of fund managers were left with unused funds that it was then too late to deploy elsewhere.

ILS Capital did not encounter this specific problem since it writes deals throughout the year, Warwick said. It has also been working hard to resolve another problem for the sector: trapped capital. It is looking to do this by changing the way buffers work on contracts increasing the point at which capital would need to be held and reducing the amount that would need to be kept.

“The problem on many deals has been that the syndicate managing agent has insisted on keeping 100 percent of the capital involved in a deal, despite there being little likelihood it would all be triggered,” Warwick said.

He added that ILS investors are seeking diversity across types of risk partly because of disappointing rate increases on cat business, and partly simply to diversify their portfolios.

“Some are considering investing in Lloyd’s, but the market remains inflexible on certain issues such as reporting and the levels of capital that need to be held on gross lines versus net.

“We are hearing about big rate increases on some lines such as in Florida but we have not seen them,” he said.

“Retro prices are likely to increase, but we are not seeing the sorts of price hikes being reported.”