APAC ILS and parametric markets poised for growth as capital needs shift: Marsh Re’s Gallagher

While both the insurance-linked securities (ILS) and parametric markets remain nascent in parts of Asia-Pacific compared to other regions, the potential to expand is clear, leading broker Marsh Re’s APAC Chief Executive Officer (CEO), Tony Gallagher, to forecast that these markets will build out.

Speaking to Artemis at this year’s Rendez-Vous de Septembre in Monte Carlo, Gallagher highlighted how the APAC region has potential to grow further within the ILS space, as well as the parametric market.

In recent years, the APAC region has moved past isolated transactions and has transitioned into a broader ecosystem, where multiple reinsurers are exploring ILS.

Rating agencies like Fitch have previously said that they expect to see a steady rise in Asian ILS issuance, supported by fixed income markets and growing climate awareness, while regulatory measures should also further drive market development and encourage catastrophe bonds along with other forms of ILS.

In terms of whether APAC will grow further in the ILS space, Gallagher said, “I think it will build out. The number of cat bonds is still relatively small, compared to the U.S. And ILS is still relatively small in APAC because you’ve had traditional solutions being able to fill that gap.”

“And so, I think the solution is a combination between ILS and the traditional markets delivering strong solutions for our clients. And I believe we’re going to have more sidecars to support growth, a product that is not prevalent in the APAC region.”

The conversation then turned towards parametric re/insurance, in which APAC continues to emerge as one of the fastest-growing regions, driven by a substantial protection gap, severe weather patterns driven by impacts from El Niño, and regional capacity constraints in traditional reinsurance markets.

Highlighting parametric re/insurance’s growing role across both public and individual risks, Gallagher said: “It is a potential solution for high CAT prone areas where traditional markets will not participate, and it is a solution potentially for governments to protect public sector assets. The Philippines has been a buyer of cat bonds and parametric. But throughout Asia, you can see parametric today providing cover for individual risks and it is a valuable tool to bring in new capital solutions.”

He continued: “What some clients struggle with is the basis risk. However, this can be managed by working with your broker to understand your exposure and specific requirements needing protection to develop the correct trigger.”

As the risk landscape across APAC continues to evolve, along with client’s expectations, we asked Gallagher to share what clients are looking for from their reinsurers, beyond just capacity and price.

“Clients are looking for holistic business solutions to protect their earnings volatility and capital. The goal is to use reinsurance as a tool to support stable returns to the shareholders. It’s moved from a number of years ago where it was pure volatility protection, it’s now very much becoming a partnership around how do I generate stable returns to my shareholders,” the CEO said.

“The reinsurance solution toolkit is growing, and ILS solutions are also expanding into long tail protection. So, what issues do you have, and how can we help address them? I think the nature of risk is changing rapidly in Asia and so too are the reinsurance solutions. This is an exciting time to review what protections are in place and leverage new products on the market.” Gallagher concluded.

Read all of our interviews with ILS market and reinsurance sector professionals here.