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Traditional reinsurers now undercutting ILS funds: Vickers

Traditional reinsurers are starting to undercut ILS funds which have trapped collateral leading to a differential in pricing between the two, according to Willis Re International chairman James Vickers.

“What we have seen is an element of trading going on where participations that some of the funds are able to offer are much smaller, unless the buyer is able to agree collateral releases, which most of them are not prepared to do,” he said, as Willis Re released its 1st View report.

A capacity crunch for retrocession cover emerged in the late stages of the 1 January renewal, as trapped ILS capital impacted the market, Willis Re said in its report.

Rates on loss-hit retro accounts increased by 20 percent to 35 percent, with loss-free retro business flat to up 15 percent.

This came in ahead of last year’s rate increases, which the broker had put at 10-30 percent for loss-hit retro and 5-15 percent on loss-free business.

Overall, 2019 could be a challenging year for some ILS managers, as some products have performed poorly and expected rate increases did not materialise following 2017 losses, Vickers continued.

He predicted ILS investors will be more sensitive about the way various funds operate and the actual mechanics of some of the deals.

“Capital is still very interested in finding its way into the market,” he added, pointing to the recent launch of a joint venture between PGGM and RenaissanceRe.

Meanwhile, JLT Re also noted that many ILS funds had had a more challenging renewal this year than in 2018, as fundraising did not fully replenish lost or trapped capital.

But the broker stressed that strong competition remained and that placements were completed in good order for the most part.

“Capacity was only pared back in areas where major losses occurred or where return hurdles were not met,” JLT Re said.

JLT Re also said reduced alternative capacity had led to a tighter retro market, where loss-affected layers faced double-digit price increases.

JLT Re’s global head of analytics David Flandro said that record levels of reinsurance capacity remained at year-end 2018, despite losses and reduced deployable third-party capital.

Higher demand for reinsurance cover and a renewed focus on underwriting discipline also played a part in a changing dynamic, he added.

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