Insurance, reinsurance and risk-linked securities (ILS or IRLS) are an “example of an innovative solution which allows the capital markets to provide an efficient and growing means to transfer risk,” according to SIFMA EVP Randy Snook.
The capital markets enable the transfer and distribution of risk, Snook explained in his opening remarks to the audience at yesterday’s SIFMA IRLS 2016 conference in New York.
“Well-functioning capital markets recognize and drive capital to the best ideas and enterprises, and this efficient allocation of capital provides meaningful benefits to individuals, companies and society-at-large,” Snook explained.
Innovation in the capital markets helps clients to “benefit from the ability to distribute risk, expansion of risk-taking capacity and increasingly attractive pricing,” he continued.
One such example of innovation in the capital markets is insurance and reinsurance linked securities, such as catastrophe bonds.
Markets need to be able to transfer and shift risk, from those that perhaps cannot afford or do not have the efficient capital to bear it, across to those for whom bearing such risks becomes a positive, in terms of return.
ILS and cat bonds provide a prime example of this type of risk transfer, enabling insurers and reinsurers to shift peak risks from their books, into the capital markets where the depth and liquidity of capital enables investors to bear risk more efficiently.
ILS and the growing market in risk or reinsurance linked securities “allows the capital markets to provide an efficient and growing means to transfer risk,” Snook continued “This market has developed to the point that it is now a well accepted part of the capital markets, with better pricing than in its infancy just a decade ago.”
“Over that time, spreads on higher quality CAT bonds have improved by as much as 200 basis points, while spreads on lower quality CAT bonds have improved in some instances by as much as 600 basis points,” he commented.
Spread development is a sign of a maturing market, with catastrophe bonds demonstrating increasing liquidity in recent years. Not just a fixture of the reinsurance renewal cycle, cat bonds and other ILS are also becoming a fixture of the capital markets investment universe, which can only continue to drive growth of this market.
Snook also warned for the need to be vigilant on regulation, to ensure it does not become burdensome or “risk impairing our ability to bring those solutions to our clients.”
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