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Original Risk: A Society for Change Agents

97% of primary insurers not taking advantage of ILS: A.M. Best survey


Responses to insurance and reinsurance rating agency A.M. Best’s latest market survey point to a huge opportunity for the insurance-linked securities (ILS) and catastrophe bond market, with only 3% of respondents noting any use of ILS capacity in recent times.

“Our respondents for these questions, all of which were within the property/casualty segment, were not as a whole, big users of ILS as only about 3% admitted either issuing or purchasing these securities over the past three years,” notes A.M. Best.

Unsurprisingly, the main reason given by insurance firms regarding the use of ILS was for diversification purposes, and as the majority of survey participants were primary players only and not reinsurers, A.M. Best declared this was to be expected.

The diversification of sources of risk capital is one of the key drivers for the use of ILS such as catastrophe bonds and collateralized reinsurance coverages, enabling insurers to access capital markets-backed risk transfer capacity to complement traditional sources.

Despite this, 3% is still a very low proportion of primary insurers that are accessing the benefits, which go beyond just diversification, of utilising ILS capacity and products as part of their risk transfer, signalling an opportunity for the sector to expand further and gain interest and acceptance from the remaining 97%.

The growing pool of alternative reinsurance capital, which competes with and augments traditional sources of reinsurance capacity, provides an increasingly accessible pool of risk transfer capital that insurers can make use of.

Despite the fact that the reinsurance market has been softening, use of catastrophe bonds and other ILS products, such as collateralized reinsurance, continue to take hold among insurers, so it’s perhaps surprising that the uptake remains so low.

The growth of ILS is something we’ve covered extensively here at Artemis and it’s an element of the alternative risk transfer landscape that has really started to gain acceptance and momentum in the last few years.

Catastrophe bond issuance during 2014 totalled around $9 billion according to data from the Artemis Deal Directory, and a significant rise in the collateralized reinsurance contracts was also evident throughout last year, two trends that have continued into 2015.

It’s clear that both primary insurers and reinsurance companies understand and appreciate the benefits of ILS capital. The 97% of respondents that responded that they had not made use of the ILS product lines are all potential customers to ILS funds and capital for the future.

Willis Capital Markets & Advisory (WCMA) highlighted this point recently; “Insurers instead should be looking to restructure their reinsurance programs to better integrate ILS capacity and make more dramatic performance and efficiency gains, ultimately to the benefit of shareholders and policyholders.”

The tough insurance and reinsurance market environment, exacerbated by intense competition and excess capacity, has seen market players increasingly search for greater scale and, or efficiency.

And it’s surprising that no more than 3% of primary players haven’t yet begun to integrate ILS capacity into their reinsurance programmes, or more directly, to support their primary insurance business portfolios.

By making greater use of ILS capital and capacity, the 97% of primary insurers who said that they have not used it to date could benefit from the efficiencies of the capital market product set, while adding diversification to their sources of risk transfer.

They also have an opportunity to more directly leverage ILS capacity within their own business, to support expansion and underwriting growth, as we are seeing at some primary players today.

Morgan Stanley recently discussed how ILS is in the early stages of casualty growth, as primarily it has focused on property catastrophe business lines, but as reinsurers increase their casualty exposures to hedge the most competitive aspects of the property catastrophe reinsurance sector, the use of ILS within this has started to expand.

As the ILS market matures and the product set offered by ILS fund managers and capacity providers expands, the opportunity to encourage more of the 97% of insurers to begin to leverage some ILS products within their risk transfer will increase.

The survey may largely be taking into consideration the use of catastrophe bonds as reinsurance by primary P&C insurers, rather than collateralized reinsurance products, and also will only involve a subset of the potential ILS client base. However it gives a good indication of just how underutilised the ILS product set still is and how large the opportunity is for continued ILS market growth.

The skills, expertise and willingness of ILS investors to support the risk transfer needs of insurers and reinsurers is clear, while the capital and capacity is, or can be made, readily available to support this.

With risk transfer pricing at or near lows, thanks to the softening market environment seen throughout 2015 and which is expected to continue into 2016, insurers now have the opportunity to diversify their reinsurance and risk transfer capital sources using ILS at perhaps the best pricing ever seen.

As a result, it’s expected that insurers will increasingly begin to think about implementing ILS into their reinsurance programs, which should help to increase that percentage uptake figure in years to come.

Register today for ILS Asia 2023, our next insurance-linked securities (ILS) market conference. Held in Singapore, July 13th, 2023.

Artemis ILS Asia 2023 - Insurance-linked securities conference in Singapore

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