‘Tremendous focus’ on investor returns means rates likely to keep rising into 2021

The impact of COVID-19 disruption and potential losses from the pandemic on the broad insurance-linked securities (ILS) market in 2020 will be limited, while a “tremendous focus” on investor returns is likely to bolster rate rises into next year.

That is the view of Paul Schultz, chief executive officer of Aon Securities, commenting on the impact across the ILS class as a whole.

However, he added: “It will be impactful around certain products including retro and sidecars and anything where you experience kind of ground-up losses. In those areas, I think you’re bound to experience losses from some of the current cat events and possibly COVID-19.”

Schultz explained that in the case of some of the products that are more risk-remote in nature, a lot of them aren’t going to be affected by what’s happened.

“Fundamentally you have to look at the risk returns of the different products and where you sit in terms of your risk and then measure how those products have performed.

“No doubt, where you’ve had the most challenges and more loss coming through, those are the markets that experienced a bit more disruption.

“Some of the other markets that tend to be focused on more risk-remote layers, cat bonds is an example, those have actually gained momentum because they haven’t seen the losses creep up.

“When you think about the growth in ILS, we’ve had disproportionate growth recently in the bond part of the market as opposed to some of the collateralised segments.

“As a total, across all ILS, COVID-19 has had a minimal impact but when you get into the different product segments you can see what’s really happened and how that is affecting parts of the market differently.”

As to rate rises and whether they would increase, Schultz said that Aon Securities as a firm had moved away from publicly forecasting rate movements.

“What I would say is that we’re in a period of time where the capital providers are re-examining acceptable risk return and as part of that we’ve started to see some rate change already year to date, and we expect in a market where there’s not really a shortage of capital, that there’s less excess capital, that there’s going to be more focus on risk and return from both ILS and traditional markets.”

With this in mind, Schultz commented that rates rises were “unlikely to end at January 1, and are more likely to continue into 2021”.

He added: “We’re not expecting to see a reversal of the rate increases that we’ve seen. If anything we’re probably looking at potentially having greater rate lifts around 2021 as well.

“We’re in a market where return on capital, and getting back to the metric of investor return where there’s tremendous focus, in both ILS and traditional reinsurance, we’re likely to be in a market where there’s greater return potential for those participating in it well into 2021.”

New capital
Schultz didn’t have specific figures on fresh capital coming into the market, but he confirmed that he expected new capital would be coming in to support ILS broadly in Q4, 2020.

“A greater proportion of that might be allocated to cat bonds as an example, so it’s more of a risk-remote type of exposure. But given where we are and what we still think to be interesting and attractive returns for investors coming through the entire year, we anticipate that we’re going to start to see greater capital start to flow back into the industry in early 2021, supporting some of the increased demand for buying that we expect throughout the year,” he said.

“We anticipate some capital coming in and it may be earmarked for different products this year but broadly speaking we’re expecting to see a reversal of some of the declines we’ve seen for overall assets under management for ILS and we expect that to rebound for 2021.”

Commenting on the opportunities of the hardening market, he said that the pipeline going into Q4 2020 “anticipates some of what is a reaction to the existing market that we have now”.

“That pipeline is made up of insurance and reinsurance companies and I think there will be a much more active reinsurance segment for cat bonds, as an example, just given the uncertainty around capacity supply for some of the other products.

“We’re starting to see some of the pipeline activity reflect the existing market conditions and I would expect that to continue well into 2021. And we’re addressing that with the kind of capital that’s available to help different types of clients.”

Schultz also highlighted expectations at Aon Securities that there would be more European ILS issuance.

“We’ve gone through a period where there was a fair amount but that has, to a great extent, decreased over the past several years.

“We’re expecting greater client interest in ILS markets going forward and that could be cat bonds or through sidecars, those types of products.

“We’re now reversing a trend with European clients about accessing the ILS market, that’s likely to increase over the next couple of years.

“We’re pretty excited about the opportunities across Europe to grow our business,” he concluded.