2011 to 2018 was without doubt a buyers’ market, what the graphs cannot show is the slippage in terms and conditions experienced in Collateralised Re products, neither do they show the impact on the Retrocession market; a much smaller but important market given that many Reinsurers rely on the Retrocession programmes to help shape their underwriting strategy. 

The Retro market is an area with opaque data and greater volatility, where capacity changes (as well as losses) are amplified in comparison to the Reinsurance space. So, while it generates superior returns, the volatility and data constraints mean that it tends to be approached with caution by ILS investors.

The proliferation of Pillared and Aggregate Products in the Collateralised Re sector during this period served to lower retentions and changed the purchasing motivation of buyers from one of capital preservation to results protection, or perhaps more cynically, bonus protection.

Lowering attachments and the spread of loss coverages in combination with increased frequency of loss events and social inflation has exposed ILS Investors to unexpected losses – Investors were sold on hurricanes and earthquakes and have been delivered wildfires and pandemics.

Flight to Quality

The consequence of a loss of confidence in Collateralised Re products has led to a flight to quality across the different market sectors. 

While the amount of capacity dedicated to ILS has remained static in recent years, this has been underpinned by the growth of the Cat Bond sector while Collateralised Re has retracted.

Investors have a far greater understanding of the insurance space than they did 15 years ago, experience has replaced naivety and dedicated insurance investment professionals have spent their whole career working in the sector.  Insurance as an asset class is attractive to investors.  It is an uncorrelated investment in comparison to other asset classes, remains largely unaffected by movements in the wider equity markets and economy, representing a very low systemic risk.

The reaction of Investors to the current market conditions appears to be a realignment of interests into investments that provide greater clarity of coverage, certainty in outcomes and remoteness of risk.  Features that are generally held by the Cat Bond product:

• Tend to sit at the top of the risk tower and is less susceptible to smaller cat losses
• More commoditised than Collateralised Re with defined perils and coverage
• High level of data granularity and clarity of information and portfolio exposure
• Independent verification of modelled losses and claims
• Most Cat Bonds are tradable on the secondary market, providing some element of liquidity

Therefore, it appears that in terms of ILS investment, Cat Bonds are in-vogue and are stealing market share from Collateralised Re, although the actual situation is more nuanced.  This is because Cat Bonds and Collateralised Re are complementary products rather than competing, buyers cannot necessarily utilise a Cat Bond purchase to make a straight replacement for deficiencies from Collateralised Re products in their traditional reinsurance programme because:

• Cat Bonds can be time consuming and costly to arrange
• Cat Bond issuance requires underlying portfolios of size and scale
• A high level of data granularity and clarity is required, often not attainable for Retrocessionaires or Reinsurers with a high level of delegated interests
• Replacing low level protection with higher attachment changes the retained risk profile and financial mechanics

Additionally, there are other factors at play that are impacting the capacity crunch.  Equity markets have responded by withdrawing credit (in terms of price valuation multiple) to companies that hold material exposure to excess property, i.e. catastrophe exposed insurance and reinsurance businesses. 

Consequently, several large, high-profile reinsurers have shifted underwriting strategies away from cat exposed reinsurance business and creating the largest retraction in reinsurance capacity seen in years, estimated at 11.2% in 2022 by Gallagher Re below, (although in fairness about half of this amount is attributable to investment losses):

Over the past 20 Years the digital revolution has transformed the way that we buy and consume products and services, giant companies have been born and become monoliths that permeate almost every aspect of our daily lives.  In the Insurance world, Insurtech funding reached $15.4Bn in 2021 spread across 566 deals (CB Insights 2022) and while the pace has slowed due to the wider post-pandemic financial and economic environment in 2022, the overall trend suggests that investment in the space will continue. 

The development and increasing sophistication of distributed leger technologies, blockchains, use of smart contracts and APIs are transforming the way that insurance products are brought to market and sold, facilitating the emergence and rapid growth of Insurtech MGA’s worldwide.  In the US alone MGA premiums are estimated to have increased 150% in the period 2015 to 2020 to $62.5Bn (Aon 2022).

While the traditional distribution landscape remains intact, largely due to brand marketing and distribution constraints for new MGA entrants, the potential exists in the form of technological and engagement enhancements to disrupt the existing model and bring new, differentiated products to market.  Insurtech’s have the capability to efficiently access business by circumventing the traditional risk transfer distribution model and in the process cut acquisition costs, make data and process improvements and improve risk carriers understanding of the original risk.

Many Insurers, Reinsurers and Brokers are reacting proactively to these developments, shifting away from catastrophe focussed reinsurance portfolios and into Insurtech/MGA led strategies, providing expertise, capacity, investment and fronting capability directly to Insurtech MGA’s and their Investors.

There is a tangible benefit for risk carriers and investors where delegated risk portfolios can be measured and understood in real time.  Detailed data capture enables catastrophe and accumulation exposures to be identified which improves portfolio modelling and analysis and loss reserving practices.

Policy issuance is automatic, premiums paid instantly, and the claims process is streamlined with valid claims paid within a matter of hours instead of months, greatly improving the customer experience.

In time, it is probable that in order to effectively compete for business and capacity, existing traditional MGA’s will have to effectively turn themselves into Insurtech’s through the adoption of technologies providing the enhanced reporting and information led strategies of the Insurtechs. 

Investors and risk-carriers are generally attracted to low-cost market disruptors who offer a compelling USP, transparency and granularity of data and information that is captured at the very start of the risk transfer chain.  Customers appreciate ease of use products that are accessible, competitive and where their claims are paid quickly and efficiently, it is a win-win scenario for all parties.

The shift in business practice and technological changes are here to stay, while there are some Insurtech’s that will inevitably fail in the coming years, the technology and route to market is proven, meaning that the better platforms will be either acquired or become unicorn companies trading as insurance entities in their own right.