Reinsurers may increasingly compete with ILS managers: Hagood
Reinsurers are likely to compete more directly with ILS managers in the future as they look to transform their business model, Nephila co-founder Greg Hagood said.
“Our view is that they will likely transform more to originators for risk and less holders of risk over the long term,” Hagood predicted, in comments reported in the latest Clear Path ILS report.
Meanwhile, cutting costs out of the reinsurance risk transfer chain is going to be the next focus for evolution in the market, after the ILS market has brought in a lower-cost, more fluid capital base, he said.
“Capital is much more fluid today than it was when you had to bring capital to the market via private equity with a new reinsurance company. This model is effectively dead now,” he said.
But with roughly 30 percent of catastrophe risk going to capital market players rather than reinsurers, the theme of bringing in efficient ILS capital “has broadly played out”, he argued.
“The next stage and evolution of the market is to rationalise a very inefficient distribution chain.”
One of the ways Nephila is aiming to do this is by vertical integration – expanding into the primary insurance market and trying to harness cost savings.
It is cost-saving techniques like this that will decide the market leaders in the future, he added.
“Leading firms will have scale and will make investments to get the risk to the capital more efficiently.”
Hagood said Nephila had been able to raise a “meaningful amount” of new capital for 2018.
“Investors appreciated the fact that we focused on returns over the past four years, so that when we made a phone call to discuss the opportunity set, it was seen as a reasonable opportunity and investors were prepared to act.”
But he said the firm was not surprised that pricing at the June renewal fell below initial market expectations.
One of the reasons for the lack of rate increase is that the events last year were largely unique in nature, Hagood continued.
A large part of claims were either retained by primary insurers or picked up by Florida’s state-backed reinsurance scheme.
“Even though the losses in the aggregate were large, they are so dispersed that the impact to the market wasn’t as great as many commentators forecast.”