Innovative and client focused approach required to drive growth in ILS

by Artemis on March 11, 2013

Last week the Securities Industry and Financial Markets Association (SIFMA) held its annual Insurance-and-Risk-Linked Securities (IRLS) conference in New York. The annual event is one of the only conferences purely focused on the so-called convergence areas of reinsurance, covering ILS, catastrophe bonds, collateralized reinsurance instruments such as sidecars, alternative reinsurance capital and reinsurance-linked investments.

The 2013 event had record attendance from a cross-section of the market, with attendees from most organisations involved in the actual deal-flow of the industry. The general feeling at the conference was that the market has grown, matured and seems poised to accelerate its growth and expansion, helped by a continually growing interest in ILS, reinsurance and catastrophe risk from institutional investors.

However, alongside the generally positive mood of participants we spoke with was a refreshing acknowledgement that for this sector to continue the successful run it’s been having of late it needs to focus on meeting and exceeding its clients expectations and driving forwards innovation.

Chairing the 2013 event was Paul Schultz, CEO of Aon Benfield Securities. As one of the more prolific structuring and arranging brokers in the ILS and cat bond space, and also being very active in the arrangement and broking of alternative reinsurance solutions, it was good to hear Schultz’s comments on the sector.

Schultz himself raised the two topics we focus on in this article, client focus and innovation. In his opening introduction and welcome, Schultz said that the ILS market needs to be innovative, client focused, capital focused and price and value focused.

He said that innovation within the ILS space will help to drive the markets growth forwards, something we totally agree with as without innovation the market could stagnate and find it doesn’t achieve as much growth. At the same time, Schultz stressed, there is a requirement for market participants to keep in mind their clients needs in terms of risk transfer finding the right way to embed ILS and collateralized or alternative sources of capital within their reinsurance or risk management programs.

These two areas are absolutely key to the ILS space, hence why we mention them so frequently in our writing here on Artemis. Without adopting a client focused approach, ensuring that structures can be flexible enough to meet clients needs and that new solutions are designed with clients in mind, while trying to find the best methods for clients to access alternative sources of capital this market could stall.

Innovation is key and this was evident at the SIFMA event. There was a lot of discussion both on the panels and in the breaks about new structures, adapting triggers to meet clients needs for cover more closely matched with their other reinsurance or retro, and talk about parametric triggers and how they can become more widely adopted. It was encouraging to hear that the market itself recognises the need to be adaptive and flexible when dealing with its clients.

This desire to innovate and meet clients needs also goes down very well with the investors who are increasingly becoming influential in the space. We spoke directly with investors already involved in the sector, with investors considering deploying capital into the space as well as with investors and advisers who are researching but not yet committed to ILS, reinsurance or catastrophe risk as an asset class. All expressed a desire to see the market grow through innovative product development and said that they would be there to support the capital needs of new products and structures as long as they made sense. It’s extremely encouraging for the markets future that these key participants are eager to see the innovation rate in the market increase.

Paul Schultz himself clearly believes the market has a bright future. He said that as an asset class ILS and reinsurance continues to be attractive to investors, thanks to the low correlation with other asset classes and its low volatility. Schultz showed slides showing how, on a cumulative basis, the total return of the ILS space (looking specifically at catastrophe bonds and securitizations) outperforms most other major asset classes available to the investor today.

Schultz seemed bullish on the potential for further growth in the ILS market, citing opportunities in collateralized reinsurance and ILS. He said that Aon Benfield Securities believes the total reinsurance market could be around $500 billion in size and that ILS and the collateralized reinsurance alternatives have a growing role to play and a chance to capture a larger portion of this market.

These comments were echoed in a number of other talks over the day of the event and the market clearly recognises a need to innovate and keep clients needs at the heart of everything it does. This approach should help to ensure the ILS and collateralized markets continued success through 2013 and beyond.

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