The insurance-linked securities (ILS) and collateralized reinsurance market, where alternative capital from institutional investors is utilised to back reinsurance risks, has reached a significant size. But further growth is possible, especially if the market comes together to target new areas of risk, according to Property Claim Services (PCS).
In a newly published manifesto PCS calls for a “reinsurance revolution,” saying that following the major catastrophes of 2017 and evidence that the ILS market was able to recover from them and trade forwards effectively, the time is right to look to new niches where its capacity can be deployed more meaningfully over time.
However, PCS notes “lack of historical loss information and other data necessary for prudent underwriting and pricing” which can often hold back new reinsurance market initiatives, as these efforts have often “lacked the robust shared loss history necessary for the reinsurance industry to support the cause.”
To achieve this the reinsurance and ILS markets need to come together, PCS explains, “overcoming the individualistic urge to fully own something small (rather than seek shared ownership in something far greater) and inspiring our friends and peers to rise up against the norm and commit ourselves to the grander future afforded by collaboration in the spirit of the collective.”
Tom Johansmeyer, Assistant Vice President, PCS Strategy & Development at ISO, explained to us, “This is the first of several “reinsurance manifestos” PCS plans to release this year, “Rise Up” really represents several years of thinking and market exploration. Through the development of the new PCS specialty lines risk loss indices – not to mention reinsurance market research and microinsurance exploration over the past few years – I kept running into a similar set of issues. A single company can innovate for itself effectively, but that isn’t always enough to move the market as a whole. Or to launch a new type of business and have it gain traction. Why is cyber still small when the exposures are massive and have been for years? Why hasn’t microinsurance gained more momentum? And these are just two areas in global insurance and reinsurance where industry-wide traction has been relatively thin.
“The key, I realized, is that there is a certain amount of industry collaboration required. And that’s a tall order. To facilitate that sort of progress, you need to show market participants that they can help drive progress while – at a minimum – not conceding any competitive advantage. Ideally, you need solutions that elevate the industry while creating more opportunity for competitive advantage. It’s not easy, but it’s crucial.”
PCS provides the loss aggregation and reporting services that help to drive a significant proportion of the property catastrophe reinsurance market, especially in the United States. With its data used by primary insurers, reinsurers and ILS funds, for data analysis, as inputs to risk modelling, and as triggers within risk transfer transactions including catastrophe bonds and industry-loss warranties (ILW’s).
The company would like to expand its own remit further, as a way to help the industry access new sources of underwriting risk.
Already PCS has broadened its own remit, outside of just U.S. property catastrophe risks, to include Canada, Turkey, marine & energy lines, and most recently terrorism risks.
PCS wants to work alongside the industry to help drive further expansion and growth, using its products and services to help foster growth and new opportunities for the ILS fund market and its investors.
“The industry needs more loss aggregation to help new lines of business grow. In the early days of a market, you need a certain amount of ILW opportunity to accelerate the allocation of capital into the space. Think about cyber, for example. In the earliest days, there wasn’t much need for retro capacity – the sector just wasn’t big enough. That’s starting to change. If cyber is going to achieve the heights everyone talks about, then reinsurers will need to be able to lay off risk. ILWs should prove to be an important part of that evolution. We entered cyber – among other specialty lines – because no other organisation is equipped to do this the way PCS is. We have nearly 70 years of history in loss aggregation, and we’ve been thoroughly tested under a variety of conditions,” Johansmeyer said.
Expansion of ILS through new risks and perils will enable faster market growth, by providing the diversification opportunities that some investors crave while allowing ILS fund managers to operate new strategies as well.
Of course, expansion for the market through innovation and access to data also benefits insurers, reinsurers and the other tiers of the risk transfer market as well. Hence working together to create the traction needed to make sourcing of new risks attractive to investors is a worthwhile revolution for everyone to get involved in.