Creativity and innovation will drive ILS expansion: Paul Schultz, Aon

Continued expansion of the insurance-linked securities (ILS) market into new business lines and geographies will require creativity and innovation, according to Paul Schultz, Chief Executive Officer (CEO) of Aon Securities.

The alternative reinsurance market has focused almost exclusively on property catastrophe business, said Schultz, explaining that he expects the market to broaden its reach over time into specialty lines and beyond.

Speaking at the Aon Benfield media event during the 2016 Monte Carlo Reinsurance Rendezvous event held earlier in September, Schultz explained that Aon Securities, the investment banking and ILS focused unit of brokerage Aon Benfield, expects alternative capital to grow to between $120 billion and $150 billion by the end of 2018.

According to the latest estimates from Aon Securities, at the end of June 2016 alternative capital amounted to $75.1 billion, an increase of 10% when compared to last year.

“We have seen a slowdown in capital coming into the industry, but just given the dynamics of return available to the end investor to come into the market, we still feel it’s a very attractive investment opportunity or allocation for those end investors,” said Schultz.

Despite lower returns investors continue to be attracted to the uncorrelated and diversified returns the ILS market offers, but in order for the sector to grow in the manner it’s been used to in more recent times, the ability to think outside of the box will be key, explains Schultz.

“I think the mandate will also change slightly. The market’s been focused almost exclusively on property cat, I do expect that to widen over a period of time, getting into specialty lines of business first, and then other things.

“We’re aware of a lot of things being contemplated at the moment. Creativity and innovation will drive that, but I think there’s a lot of thought being given to that at the moment,” said Schultz.

Schultz continued to explain that Aon is aware of new funds or new underwriting companies that are creating funds to invest in the sector, suggesting that the desire and ability of ILS to expand outside of the competitive property catastrophe arena, in a meaningful way, could be on the horizon.

For the market to reach the $150 billion mark by the end of 2018 supply certainly isn’t the issue, added Dominic Christian, Executive Chairman of Aon Benfield International and CEO of Aon UK Limited, but whether the market can get the demand required.

Artemis discussed during the 2016 meeting of the reinsurance industry in Monte Carlo how large ILS players were now actively raising capital, and Schultz alluded that it will likely be deployed “in all of the above.”

“My expectation is that you’ll continue to see capital being deployed in distribution that compliments what we have today.

“So it’s not necessarily going to just be increasing property cat investment, it’s going to be doing other things. Whether that’s through MGA’s or other types of distribution. So I would anticipate that to increase, but the core business also to increase as well,” said Schultz.

It will be interesting to see what kind of innovative and creative solutions the ILS market facilitates in the coming months and years, especially with the risk landscape evolving at a faster rate than ever before, and the increased sophistication of the ILS investor.

ILS funds and managers, along with their investor base appear more and more eager to get closer to the original source of the risk, and in their desire to access returns outside of the competitive and compressed property catastrophe space, new solutions should have the capacity to flourish, and provide benefits right down to the end consumer.