External capital is waiting to pour into insurance securities once a hard market arrives, according to Tony Ursano, president of reinsurance broker and ILS advisory firm TigerRisk.
Speaking at Trading Risk‘s Convergence London 2017 conference today, Ursano said: “Many ILS detractors have suggested that capital may not be available after a large loss. We believe just the opposite. We believe capital is being readied for an environment where yields may rise post-event.”
The insurance industry will be “unrecognisable” in a decade as capital floods in, he said.
Ursano raised the example of one fund already preparing itself for the next hard market.
Stone Ridge Asset Management has created a $2bn post-event fund. The capital would be deployed into the ILS market in the event of mega-catastrophes pushing up yields.
More widely, there is a “substantial mountain of capital on the sidelines, much more than most people appreciate”, Ursano continued.
He predicted that pension fund assets coming into the ILS market could increase fivefold to $364bn in the future.
The figure comes from Ursano’s assumption that for the market to be “meaningful” as an asset class for pension funds, which manage trillions worldwide, ILS must account for 1 percent of their total assets, “or else why bother”.
“ILS is tiny compared to any other asset class,” Ursano noted.
He also said that institutional asset managers, such as BlackRock and Fidelity, have little exposure to ILS, but there are signs that this is changing.
A review of the shareholder register of listed ILS fund Markel Catco shows that all of the company’s top five shareholders are big money managers, including UK-based Schroders and M&G.
More broadly, Ursano criticised the insurance industry for being slow to adjust to opportunities presented by third party capital.
“This industry has been extremely effective at resisting change, but the forces at work are so powerful today that anyone who is invested heavily in the status quo is probably just going to fail,” he said.
The executive drew a parallel with the private equity industry, where large Canadian pension funds have started buying private assets.
The same could happen in insurance, he suggested, with investors hiring underwriters to bring their expertise in-house.
Ursano was pessimistic about the fate of traditional insurance brokers, with investors able to go direct to insurers and their customers.
He predicted that investors would become more canny about going direct to customers, cutting out “middlemen like me”.
“The gravitational force of a massive amount of lower cost capital will be hard to resist. Over time risk will find its way to the most appropriate and best risk underwriters and originators,” he said.
“Intermediaries who don’t facilitate and add value to that in that process will probably become extinct.”
Source: Trading Risk