Don’t bank on new ILS capacity ahead of the year-end renewal: Hiscox CUO

It seems increasingly unlikely that new insurance-linked securities (ILS) capacity will enter the market ahead of the year-end renewal, despite rising rates and improving terms and conditions, leaving cedants to fight it out for limited traditional capacity, Matthew Wilken (pictured), chief underwriting officer of Hiscox Re & ILS, told Intelligent Insurer.

“Normally we would be expecting some quite positive signs in the market and a lot of press coverage about new entities starting up and new capital flowing in,” he said. Instead, that traditional run of market talk has been either missing, or “if anything, the speculation has been of the reductions and the reticence to re-engage”.

Of white knights who could ride in: “There is rumour in the market, but it is only that,” Wilken said. He acknowledged that the breadth of capital markets investors with an interest in ILS was big, but this was not translating into deals—yet.

“It’s a big potential pool to fish in. But unless the market shows an active response to the losses we’ve been seeing, the appetite may be restricted.”

The situation contrasts with the situation earlier this year. Hiscox claimed to have swept up $561 million in institutional ILS money in the first half of the year to bring assets under management to $1.9 billion.

But Wilken says this was less indicative of wider trends and more due to Hiscox’s deep relationships with long-term investment partners. He describes the H1 success as “something to celebrate when many in the market were finding that raising capital was amazingly difficult” but it took “very dedicated investor relationships”.

More recently, he suggests, investors are more likely to be counting the cost of Hurricane Ian and considering new commitments. “At the moment, most of the activity I see is trying to assess how much collateral players have following Ian and other events during the year,” Wilken said.

He acknowledges that in the aftermath of other big losses, such as Hurricane Katrina, rising rates have acted as a catalyst to draw more money into the market. That is not yet true this time around. “What I see now is not the same appetite to re-engage post-Ian as I’ve seen previously,” he said.

In the absence of new capacity, however, he argues that the gap between inflation-driven demand and capacity is bridgeable—at the right terms and the right price. “I think there is capacity to be able to satisfy most demand,” Wilken said. Capital shortfalls could be plugged first in the international space, only later and “not as easily” on the North American side, he suspects.

He also acknowledges that the adjustment required of cedants, in price, structure and wordings, looks “material”.

“There will be a flight to quality, and I hope it is not just price, but an opportunity to focus on improvement in terms of how the contracts are written,” he said. That means wordings, that means structures, that means defined perils, that means less aggregate excess of loss, Wilken says, to largely match the rising chorus from reinsurers during the ongoing season.

“When those terms are ready, I think I am going to see prices in this market I haven’t seen in a very long time,” he concluded.