This is our first in a series of articles featuring the thoughts of leading figures in insurance-linked securities (ILS) and reinsurance on the market as we move into 2016. The first piece features Rick Miller and Michael Popkin, Co-heads of Insurance Linked Securities at Jardine Lloyd Thompson Capital Markets.
We asked for participants thoughts and predictions for the ILS market, catastrophe bonds, collateralized reinsurance and reinsurance or catastrophe risks as an asset class as we move into 2016.
Rick Miller and Michael Popkin are Managing Directors and Co-Head’s of Insurance Linked Securities at insurance and reinsurance brokerage capital markets unit Jardine Lloyd Thompson Capital Markets.
The pair gave us some thoughts on how ILS will develop in 2016, the potential for corporates to embrace the ILS sector for insurance risk transfer, and where new opportunities may lie for ILS markets and investors.
Their response follows in full below:
As 2016 approaches on the horizon, we at Jardine Lloyd Thompson Capital Markets, Inc. see two key themes emerging from the dynamic ILS landscape.
Firstly, we expect to see 2016 as the Year of the Corporate, a year in which a greater number of corporates will transfer catastrophe risk to the Insurance Linked Securities (ILS) marketplace.
Secondly, we expect to see a greater number of Florida homeowner insurance companies to transfer their Florida Hurricane Catastrophe Fund (FHCF) layer to the ILS marketplace as well—building off the momentum established by our lead role in transferring FHCF risk through our efficiently priced Market Re private placement cat bond platform.
With the growth and maturation of the ILS marketplace (e.g., increased assets-under-management) and the equity market’s demand for efficient risk transfer, we believe 2016 to be the perfect time for corporates to fully embrace ILS technology.
Two key areas where companies can transfer cat risk to the ILS markets are business interruption (BI) and contingent business interruption (CBI).
The traditional (re) insurance markets have not covered BI and CBI well. They lack the structural benefits gleaned by many ILS products.
For instance, a parametric structure (e.g., Richter Scale for a quake) allows a cedant quick access to cash in the midst of natural catastrophe scenario, a valuable feature to a company under the spotlight of shareholders and analysts. Moreover, ILS funds need not be concerned with the occurrence of an insurable loss. Rather, they need only be concerned with trigger activation (think MultiCat Mexico).
Corporations with complex supply chain systems run substantial BI and CBI exposure: consider the potential impact of a modern-day 1906 San Francisco earthquake on profitability; consider the cost of having key transport links decommissioned for months; consider the cost and dysfunction associated with relocating operations and sourcing new suppliers (all at the same time as competitors); consider the equity market’s response to a company with insurance—which has already paid out—and a competitor waiting to see; consider the material impact on market capitalization; consider all of these risks and costs relative to the cost of an ILS hedge. The ILS capital markets are well-positioned to offer such parametric structures of varying sizes to corporates.
In 2015, we saw some FHCF risk transferred to ILS investors for the first time. Historically, the private markets have not been more compelling than the public markets. However, this view is changing.
Shifting a portion of the FHCF layer to the capital markets can be enormously beneficial to the cedant, depending on where in a cedant’s program the FHCF layer sits. Indeed, it allows the cedant to diversify and expand its base of protection sellers. It also allows the cedant to potentially achieve better overall pricing.
Given the groundwork that we helped build in 2015, we expect to see additional cedants utilize ILS markets for FHCF risk transfer. We also expect to see more of these deals achieved through the use of private placement cat bonds, due to its more efficient cost structure (such as the Market Re platform).
Overall, 2016 will be a continuation of the dynamic growth that the ILS marketplace has experienced over the past few years. We expect corporations as well as Florida homeowner insurance companies to make greater use of the evolving ILS markets.
Our thanks to Rick Miller and Michael Popkin for their time.
Like to be featured in an interview on Artemis or have some thoughts on the market for 2016? Contact us to discuss.
Artemis’ Q4 2015 Catastrophe Bond & ILS Market Report – Outright market growth continues
We’ve now published our Q4 2015 catastrophe bond & ILS market report.
This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the fourth-quarter of 2015, looking at the $1.525 billion of new risk capital issued and the composition of the cat bond & ILS transactions completed during Q4 2015. The report also includes a review of the full year 2015 issuance and commentary from co-editor GC Securities.
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