Public entities use of ILS to grow as new structures emerge: WTW

by Artemis on October 25, 2016

Public entities are expected to utilise an increasing volume of capital markets features and capacity, as the insurance-linked securities (ILS) space continues to innovate and expand. However, growth in this area is currently limited due to price competition, according to Mark Goode of Willis Towers Watson (WTW).

Earlier in 2016 Willis Towers Watson announced the establishment of a North America Public Entity practice that would be led by Mark Goode, Managing Director (MD) of the new unit.

The new unit is designed to provide risk management, consulting and brokerage services to an array of public sector entities, and Artemis spoke with Goode to get his thoughts on the potential for public entities to use ILS instruments, such as parametric triggers for catastrophe and weather risk transfer.

Currently, explained Goode, “Capital is very cheap and capacity is at an all-time high. Thus, we are seeing little demand for parametric triggers and CAT bonds. Alternative market solutions are best suited for public entities that have high values that are fully CAT exposed.”

“Currently, the availability of wind coverage is practically unlimited in the traditional market. In the eyes of most insureds, the traditional market is providing better coverage at competitive rates,” said Goode.

It’s an interesting and valid point, and something that we’ve discussed at Artemis previously when discussing the rise of collateralised reinsurance placements at a time of slower cat bond market growth, which some in the space have alluded is due to current market conditions being more favourable to the collateralised re structure.

The re/insurance market remains overcapitalised and with firms across the industry looking to reduce costs, it’s possible that the timing and costs associated with issuing a cat bond might be driving investors and sponsors to look at the collateralised reinsurance marketplace.

As a result of the abundance of capital in the space, buyers, including public entities, have been able to take advantage of cheaper traditional reinsurance protection, perhaps resulting in less demand for ILS structures, such as parametric triggers and cat bonds.

“I anticipate the usage to grow as the capital markets find new ways to structure coverage and as brokers access capital markets as both a source of coverage and to squeeze conventional markets into further rate reductions,” continued Goode.

Goode suggests that the ILS space will continue to innovate and find ways to structure coverage in a way that makes it affordable and effective for public entities, which can face a broad range of risks that might be better backed through the capital markets, or via a combination of traditional and alternative reinsurance solutions.

However, while brokers, and certain ILS funds/managers for that matter, look at ways of partnering ILS solutions and capital with the underlying risks, expansion of the ILS space could result in further rate reductions for the more conventional markets, explained Goode.

Speaking at the time of his appointment and the launch of the new Public Entity practice, Goode said; “Willis Towers Watson is committed to the public entity sector and already had a strong track record of success in serving government entities in select markets. By establishing a national practice, we are formalizing this specialty business in our portfolio with the aim of delivering a finely tuned strategy and coordinated resources to better serve clients, while increasing our share of this important market.”

“Today public entities are confronted with a complex and evolving risk environment combined with heightened public scrutiny and tighter budgets. These entities have unique risk profiles that demand customized solutions. Willis Towers Watson, with its deep expertise, strong market position and custom analytical tools, stands ready to deliver for the public sector.”

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