Insurance-linked securities thoroughly back in favour

by Artemis on November 26, 2009

There was a time in this market when talk of a downgrade or loss would have stimulated talk of the collapse of the catastrophe bond and the failure of the alternative risk markets to protect its investors. I’m pleased to say that the market and its observers seem to have matured enough to realise that ILS and catastrophe bonds are here to stay (in some form or another, we do expect the market to evolve) and a much needed dose of realism seems to have emerged.

As asset classes go one of the laudable things about the risk transfer market is that they never hide the fact that investing is risky and you can win as well as lose when you get involved in the ILS market. For years many financial markets have worked hard to brush the spectre of risk under the rug, not so in ILS, thanks to the fact that it revolves around risk itself and reinsurance there never was a chance to cover that up. That said, any news of a cat bond being triggered or an insurance linked deal being downgraded was once enough to spook the market into retreat.

Not so anymore (I feel). All we are hearing from market sources is positivity about the future. Traffic (visitors) to this blog and the rest of Artemis is up 60% year-on-year (testament to the massive interest in this asset class). Referrals to this site from search engines where part of the keywords used include the word ‘invest’ are up a staggering 450% year-on-year which is quite amazing and shows the huge increase in interest from the investment world in this market. Press coverage is way up on last year, which is surprising given the volume of negative press from last year compared to the positive from this year. And potentially most telling of all is the fact that nobody I have spoken to has made a fuss over the downgrade and potential triggering of Glacier Re’s Nelson Re transaction. That shows a maturity among both investors and market participants as once upon a time people would have run screaming from the market at the slightest hint of a loss.

As an observer to the insurance-linked securities market it seems to be growing in health, stature among investors is increasing and more and more insurers are expressing interest in issuing deals. This has been helped greatly by the prudence shown by the market and the rational approach to the collateral problem. The slow and steady resurgence of the market is good for investor confidence too as issuers slowly came forwards with their new collateral approach and didn’t all rush at once to get capital markets funding running again.

The future is bright for insurance-linked securities and as long as the market remains prudent in its approach, innovative with respect to evolution of the market and realistic in its ambitions then it will continue to be bright.

What factors do you feel have contributed to the resurgence of the insurance-linked securities and catastrophe bond markets? And what do you feel needs to happen to enable the market to continue its growth?

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