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Willis Re International chairman predicts 'flight to quality' in ILS managers

Investors may look to concentrate their dealings with managers of insurance-linked securities as the market matures, according to reinsurance broker Willis Re International Chairman James Vickers.

ILS managers act as bridges between capital markets investors and the insurance world. Speaking to S&P Global Market Intelligence at the Monte Carlo Rendez-vous, Vickers said many significant ILS investors' mandates will come to market toward the middle and end of 2019.

"In any maturing market, what you would then expect is the big investors would look at the performance of all their managers and then begin to differentiate," Vickers said. "Why do I deal with six when I could deal with two? One would assume there would be a flight towards quality."

The shift could favor larger ILS managers that can afford to invest in additional capabilities such as catastrophe modeling and analytics, Vickers said.

"They are doing a lot more because they realize that not only do they need to understand the risk better, but they need to, when they present to investors, have their own view," he said.

There is a growing alignment between traditional reinsurance capacity and coverage provided through ILS as reinsurers are increasingly using ILS as capital to back their underwriting. In these situations, reinsurance contracts will appear to be traditional ones from the client's perspective, but the money backing it will be from capital markets investors rather than the reinsurer's capital base.

"ILS products are a bit clunky in terms of executing, whereas everybody understands the traditional insurance and reinsurance contract," Vickers said.

Similarly, recognizing the more user-friendly nature of a more traditional reinsurance contract, some ILS funds are finding ways to offer traditional, rated reinsurance capacity to reinsurance buyers.

"I don't want to say this declares victory for the traditional markets, but it is an alignment," said Vickers.

Further examples of the alignment of the traditional and ILS markets are U.S. insurance group Markel Corp.'s recent deal for ILS manager Nephila and American International Group Inc.'s transaction for Validus, which included ILS manager AlphaCat Managers.