ILS Market Filling Capacity Holes and Holding Down Reinsurance Rates, Exec Says

NEW YORK — The rise of insurance-linked securities has had the effect of flattening the reinsurance-pricing cycle, and preventing rates from rising, according to a former reinsurance executive.

Speaking at Keefe, Bruyette & Woods' Insurance Conference held here, Don Kramer, now CEO of ILS Capital Management, noted that the aftermath of the 2011 catastrophe events shows the impact insurance-linked securities have had on the marketplace.

Last year was the second-costliest year for catastrophe losses. Kramer says, “You would think that we're getting rate increases. And the fact is that insurance-linked securities have actually leveled the market.”

He noted that insurance-linked securities are filling a hole after major catastrophes that was previously filled by the formation of new (re)insurance companies. “After every event, new companies were formed,” he said. “That was the way we refinanced the industry. But now, when you have losses, insurance-linked securities make up for the capacity drain.” 

While this new dynamic is positive from a capacity standpoint, Kramer notes that it is resulting in lower rates.

Aon Benfield recently stated that sales of catastrophe bonds have reached a four-year high and are expected to hit $6 billion by the end of the year.

A story by Reuters notes that cat bond issuance totaled nearly $6 billion in 2008 before falling sharply as the financial crisis struck, “but the market for cat bonds has since improved as investors' memories of the crisis faded, soothed by double-digit returns for many ILS.”

The story quotes Aon Benfield Securities Chief Executive Paul Schultz as saying, “New capital flowing into the reinsurance sector is currently around $5 billion, with around $3 billion of that moving into the Insurance Linked Securities sector and the remainder into permanent capital facilities.”