Distinction between ILS & reinsurance to keep blurring

by Artemis on March 5, 2015

The lines between insurance-linked securities (ILS) and capital markets backed sources of reinsurance cover and the traditional market are set to continue blurring, however some features of the ILS product remain differentiators, speakers at the SIFMA event said yesterday.

One of the topics discussed at the SIFMA Insurance and Risk Linked Securities (IRLS) 2015 conference held in New York yesterday was the fact that ILS capacity is no longer seen as alternative, apart from the fact it remains a different but complementary option for cedents to leverage as a source of risk transfer.

Speakers on the first panel of the day discussed the need to help clients understand that while ILS is an alternative to their traditional covers, the word should not be assumed to mean that it is a vastly different form of capacity but rather that it can meet their needs in a very similar way to the traditional reinsurance capacity they are more used to.

Aditya Dutt, President at RenaissanceRe Underwriting Managers, said that clients “will stop distinguishing between alternative and traditional” form of reinsurance capital, adding that the “lines will blur further” between the two in the future.

ILS specialists have been striving to respond to cedent needs to make alternative capacity a comparable option for a reinsurance programme component and these efforts are set to continue as they seek to maintain equivalence in terms of protection, while maintaining the cost-of-capital and efficiency benefits of the capital markets.

Paschal Brooks, Portfolio Manager at AlphaCat Managers Ltd. the ILS unit of reinsurer Validus, said that there are still distinctions between traditional and alternative capacity, one of which is the fully-collateralized nature of the ILS product.

This distinction is an important one, for some cedents the diversification of risk capital sources is key and the fact the ILS capacity is backed by collateral is seen as a positive when they select which counterparties to work with.

The benefits of fully-collateralisation may become more apparent as the lines between the two products continue to blur. The collateral aspect will not go away and hence this could become a defining feature in the future, as the two forms of coverage become ever more equal in terms of protection offered.

Duncan Ellis, a Managing Director at insurance brokerage Marsh, said that the distinction will continue to get more narrow, but that it will still exist. However he cited other features of the ILS market such as the use of fronting arrangements, where collateralized capacity utilises rated paper to access risks, as something that is narrowing the distinction between the two.

The blurring of lines between the alternative and traditional (or capital markets and balance sheets) will come down to cedents needing to become better informed and more adept at working out where ILS capital is best put to work in their reinsurance programmes.

As the lines become more blurred between the two types of capacity it will become increasingly important that ILS players double-down on ensuring that while they can match the protection offered by traditional reinsurers, that it dovetails nicely with it and makes cedents lives easier at renewal time.

We’ve asked the question before, what if alternative capital was indistinguishable from traditional reinsurance? This is one of the drivers of continued growth for the ILS market, the ability to become more comparable with traditional reinsurance while still offering the benefits of full-collateralisation and efficiencies of the capital markets and third-party capital.

These distinctions are set to continue to help the ILS market grow, but as the lines become more blurred the job of selling the protection perhaps becomes even harder as customers become more discerning and seek new features and benefits from the product as well.

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