RenRe’s O’Donnell: ILS market under pressure
Insurance Linked Securities could lose their lustre for investors amid the COVID-19 lockdown.
By Garry Booth, Contributing Editor
The ILS market risks stagnation as a result of disincentives stacking up for investors, according to RenaissanceRe President and CEO Kevin O’Donnell. Speaking to Reactions at the end of September, O’Donnell said the ILS market is facing a challenge because of the trapped capital issue that came of the 2017-19 loss years. Added to that, there are concerns among investors about cat frequency this year as well as the uncertainties around COVID-19, he says.
“As COVID-related losses come into the ILS market, in addition to a global recession, investors such as pension funds could reasonably start to ask if ILS is still a zero-beta asset,” says O’Donnell. “Investors expect losses from hurricanes and they expect losses from earthquakes – they didn’t expect that a pandemic could produce losses as well.”
ILS represents an important market for RenRe, which has been an active participant since the late 1990s. The company manages invested capital worth over $9bn, and third-party capital is an important component of its own general risk management strategy.
“RenRe has different structures we can offer the market. Each one is based on what we think is the most efficient capital to bring to our customers’ needs. We have rated vehicles like Vermeer, Top Layer Re or Da Vinci. But we also have the more traditional cat bond fund vehicles Medici and Upsilon,” O’Donnell notes.
“We are not concerned about our ability to take the risks our customers want, whereas other ILS funds might be more challenged if they can’t release the collateral to take risk in 2021,” he adds. “The situation will become clearer in the next several months.”
New investors into the ILS space could also be deterred because such investors like to visit prior to allocation - which won’t be possible in a lockdown environment, O’Donnell believes.
Finally, the governance element of ILS funds is an increasing focus for allocators because of some of the loss-reserving problems encountered by some players in market. “We expect to see a flight to quality take place, resulting in some market consolidation,” O’Donnell concludes.
See the October issue of Reactions for the full interview with Kevin O’Donnell here.
