Asia can drive new phase of ILS growth: ILS Asia 2018 speakers

The region of Asia can provide a new source of growth for the insurance-linked securities (ILS) market, as steady expansion of catastrophe bonds and collateralised reinsurance are set to continue in the area and the level of education about the market increases, according to speakers at our ILS Asia 2018 conference yesterday.

We held our third Artemis conference at the Suntec Convention Center in Singapore yesterday, Thursday July 12th, joined by more than 150 attendees on the day.

Artemis ILS Asia 2018 saw a mix of international and regional ILS, risk and reinsurance industry speakers discussing the state of the market and key issues of relevance to the insurance-linked securities (ILS), collateralised reinsurance and risk transfer markets both in Asia and beyond.

The overwhelming conclusion was that the ILS market is destined to expand more deeply into Asia, both on its own merits as an attractive and cost-effective risk transfer and alternative investment option, as well as through continued alignment with insurance and reinsurance partners as a valuable source of alternative capacity.

Providing an opening statement at the conference, Jacqueline Loh, Deputy Managing Director of the Monetary Authority of Singapore, discussed the important role that the capital markets can play in global risk transfer.

Loh welcomed attendees to the Artemis conference yesterday and commented that, “The development of the ILS market has been a remarkable story of innovation.”

“Asia holds promise for the next phase of growth of ILS, given the regions growing needs and Singapore can play an important role to facilitate this growth,” she explained.

“ILS is becoming more prominent in Asia and prospects are bright for the coming years,” Loh continued, adding that helping to stimulate the continued expansion is that, “Alternative capital is becoming an increasingly important part of an insurers risk transfer toolkit.”

In a keynote speech Lorenzo Volpi, Partner at London headquartered specialist ILS asset manager Leadenhall Capital Partners LLP, explained that Asia is already an important component of the insurance-linked securities (ILS) market, both in non-life and life risks.

Volpi explained in a speech on the state of the ILS market today in Asia that in the non-life or property catastrophe risk space, Asian perils account for around 11% of the outstanding catastrophe bond market and about 12% of issuance in 2018 so far is Asian peril exposed, although all currently Japanese risks.

These Asian peril cat bonds play an important role in helping ILS investment managers to diversify their portfolios, hence the appetite from the investment community for an expansion of ILS activity in Asia is clear, something reflected in the speeches and panel discussions at the ILS Asia 2018 conference yesterday.

But it’s not just property catastrophe risks where Asia is already prominent in ILS. Having a focus on managing life insurance-linked assets as well at Leadenhall, Volpi highlighted, “When you think about Asia, Japan is actually the second biggest market for life risks in the world after the U.S.”

Jinal Shah, Managing Director, Capital Markets Solutions at catastrophe risk modelling specialist RMS, explained in a keynote the important role that risk models play in the ILS market, particularly in helping ILS investors and portfolio managers in their response to major loss events like those seen in 2017.

He discussed the importance of model consistency and the confidence this can give to industry participants, but noted that consistency can be lower in less well-modelled perils, an issue today in some parts of Asia.

The important role of risk models in assisting the development of an ILS market in Asia is clear and Shah from RMS highlighted how ongoing, frequent updates and further development of risk models can support continued ILS market growth and expansion.

Low insurance penetration in many parts of Asia means premiums in the countries are often too small for much in the way of reinsurance capital participation, but here there is a role for the ILS market in supporting continued premium growth.

Chairing a panel discussion on the protection gap and opportunities for the capital markets Chris Caponigro, Head of Business Development at Mt. Logan Re Ltd., the collateralised reinsurance and third-party capital vehicle of reinsurer Everest Re, suggested,  “Given the ever-growing appetite in the capital markets to assume insurance risk, low insurance penetration in many geographies of the world could perhaps be assisted by this abundance of efficient capacity.”

“There is plenty of capital markets capacity, reinsurance capital, insurance capital to support risks when they are properly underwritten, the data is available, the modelling tools are available,” he continued, highlighting important issues that continue to hold back insurance penetration in some areas and classes of business.

The sophistication of the ILS market was also discussed, with panels looking at structural trends and ways to match capital with risk.

Michael Stahel, Partner and Portfolio Manager at Swiss headquartered ILS investment specialists LGT ILS Partners Ltd., discussed the importance of efficient reinsurance structures within the ILS market and the range of options available to cedants from fully collateralised to fully rated.

Discussing his firms own recently rated reinsurance vehicle Lumen Re, Stahel explained that the rated nature of the company can make it easier for his ILS funds to trade with smaller and regional insurers, for whom a fully collateralized deal can be more daunting.

The Lumen Re initiative is “More geared towards smaller insurance companies that want to get involved with ILS markets but don’t have the expertise or man power to check collateralised structures,” Stahel said.

Speakers explained how the continued evolution of ILS market sophistication will be particularly relevant in regions such as Asia, where re/insurers could be more open to ILS markets if the route to access collateralised capacity can be simplified.

In a keynote speech later in the day Lixin Zeng, CEO of AlphaCat Managers Ltd., the ILS investing unit of global insurance and reinsurance specialist Validus Group, highlighted the impacts of hedging underwriting risk on ILS fund returns and how portfolio theory approaches to hedging can have benefits.

Zeng also discussed the efficient nature of capacity backed by the capital markets, highlighting that globally and in Asia, “ILS gained meaningful market share by being a low-cost source of capital,” and is an increasingly important capital planning tool for re/insurers.

Expansion of ILS in Asia is a given, especially if the market can capitalise on its lower cost and as the region offers a valuable source of diversifying catastrophe exposures for ILS investors. However speakers also highlighted the need for continued and increased investment in data and risk models, in order to support faster expansion in the region.

The opportunity for Singapore itself to become a domicile offering insurance-linked securities (ILS) options and become a regional hub for ILS in Asia was discussed at length, with speakers concluding that the natural evolution of the ILS market as it grows and expands further into Asia would be for transactions to be located regionally.

ILS is a natural evolutionary step for the Singapore insurance, reinsurance and capital market and one that can help to foster the further expansion of ILS activity in Asia, which ultimately could be a catalyst for further ILS market growth.

Additionally, the Asian investor base is expanding with an increasing awareness of the benefits of adding ILS and reinsurance linked assets to the investment portfolios of Asian pension funds. As well, a number of large sovereign weather investment institutions in the region are also looking to ILS as a source of relatively uncorrelated returns.

We’d like to thank our attendees for joining us yesterday. We hope you enjoyed the event and thank you for your contributions in terms of questions and discussions.

To all our speakers, thank you for your participation, for sharing your expertise and providing thought-provoking discussions.

To all of our kind sponsors of the ILS Asia 2018 event, thank you for your support without which the day would not have been possible.

We hope you can join us next year for ILS Asia 2019, which will be held around the same time of year (date to be announced in due course).

For all enquiries regarding sponsorship opportunities for future Artemis events please contact us at [email protected].

Artemis’ next conference will be ILS NYC 2019, New York, February 1st 2019. Tickets will be on sale for this event very soon, please save the date.

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