Mathieu Halm, Head of Retrocession & Strategy at CCR Re, shares his thoughts on the latest news developments affecting Insurance Linked Securities (ILS) which he selects on a quarterly basis. Although still not well-known, the securitization of insurance and reinsurance risks is a fascinating industry topic.
The French Securitization Mutual Fund (FCT), a vehicle particularly well adapted to private ILS deals.
We advocate that it is in the best interest of the Paris Marketplace to enhance its development of private deals so as to attract sponsors seeking to penetrate the ILS market for the first time.
A platform supported by a Securitization Mutual Fund such as 157 Re, the fund created by CCR Re, offers access to the capital markets. This type of structure transforms insurance risks and provides them directly to investors looking to find growth drivers uncorrelated with traditional assets. To this end, the format of the Securitization Mutual Fund is conceivably more conducive to the issuance of private deals for sponsors focused on long-term investments.
It is certain that this type of transaction imposes a significant constraint in that it deprives the sponsor of an entire segment of ILS investors.
Nonetheless, its main advantage lies in its ability to offer players of relatively modest size the possibility of creating their own means of accessing the capital markets while they may also open the hood of the vehicle and get their hands on the motor thereby acquiring additional expertise. Even better, these players may gain more independence and, above all, develop strategic long-term partnerships to accompany their growth.
The expertise they develop by creating their own platform enables them to more easily transition toward larger transactions such as compatible 144A Cat Bonds. It may also provide them with the opportunity to expand their operations to other jurisdictions depending on their specific needs as issuer, namely Bermuda, Ireland or even Singapore just to name a few.
We may however consider that a player seeking to invest in ILS over the long term has every interest in playing the proximity card while using his knowledge of the applicable culture especially when capital requirements are not counted in billions.
The FCT perfectly suits this type of need due to its ability to be divided into compartments. Above all, it may also attract French and European sponsors seeking an efficient tool to accompany their growth over the long term while enabling them to cope with all the different aspects.
There is one aspect that we tend to underestimate in our primarily global industry; the mastery of cultural concepts. We can indeed undeniably consider it a given that the majority of non-Anglo-Saxon potential sponsors includes professionals with the capacity to create an SPV in Ireland, London or even Bermuda in the framework of the issuance of a Cat Bond or a sidecar. And, this also applies to players of relatively small size.
We might also undeniably consider that these same players of modest size would prefer to begin structuring their ILS within a legal, regulatory or service company environment with which they are more naturally familiar. And this applies especially to cases where the sponsor seeks to have the technical control of his platform, without being dependent upon a service provider in the event he wishes to reuse the vehicle.
The democratization of ILS requires the emergence of new jurisdictions that may be used as a stepping stone for a certain type of sponsor who knows nothing of the ILS market but could however access it.
What will be the prevailing trend for our industry in 2022?
According to Swiss Re, the hardening of re/insurance rates should continue in 2022. This stems from a simple fact. The tightening of capacity is not the result of a decrease in available capital but rather from a downward revision of risk appetite.
In its article, the Swiss reinsurer stipulates that the reduction in the risk appetite of market players is fueled by doubts that weigh on risk modeling in a market environment that is uncertain at the least.
In any case, it is clear that after the Florida renewals, the market is not hard but reinsurers’ appetite for lower layers has been significantly reduced.
It will be interesting to see, for the January 1, 2022 renewals, how the different players will position themselves. But between now and then, many things could happen.