Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Capital markets in reinsurance for the long haul, says JLTCM’s Popkin


The diversification offered and uncorrelation achieved in the insurance-linked securities (ILS) space, and its record of paying claims suggests the capital markets won’t be leaving the reinsurance industry anytime soon, according to Michael Popkin, Managing Director and Co-Head of ILS at JLT Capital Markets (JLTCM).

“Capital markets are here to stay,” says Popkin, explaining that a large number of reinsurance companies now utilise ILS capacity and features in some form or another, making it “increasingly difficult to tell what is a traditional reinsurer and what is a capital market fund.”

In a recent article on the JLT Re website, Popkin explores the future of the expanding and increasingly mature alternative capital space, in response to concerns and beliefs of some in the risk transfer world that the ILS space could come to an end when the softening landscape turns.

Recent estimates put the volume of alternative reinsurance capital in the global reinsurance sector at between $70 billion and $75 billion, which represents substantial growth from the reported $17 billion seen at the end of 2012, as noted by JLTCM.

Over the last few years collateralised reinsurance has overtaken catastrophe bonds as the main source of capacity in the ILS space, and during this time the range of vehicles and strategies that incorporate ILS has advanced and expanded, enabling a greater number of insurers and reinsurers to take advantage of the market.

The increased product offering and broader market reach, combined with significant diversification and importantly, uncorrelation with wider financial markets, has helped the market continue down an impressive growth path over the last decade or so.

“Pension funds, endowments and large managers of capital want to invest in uncorrelated asset classes. Catastrophe risks are very much uncorrelated with the broader economic risks most portfolio managers face, whereas there is such a correlation with crude oil prices, which have a direct impact on equity prices and foreign exchange holdings,” said Popkin, explaining the appeal of the asset class to capital markets investors.

While Rick Miller, Managing Director and Co-Head of ILS at JLTCM, said; “Mother nature does not care about the size of the mortgage on the house it is about to destroy, nor does it care whether that mortgage happens to be securitised into a bond format.”

Some in the industry have, in the past, questioned the ILS market’s ability to remain interested in the space when a large event takes place, and also the market’s ability and willingness to pay claims in the future.

However, Popkin feels that these fears are completely unfounded, asking, “why would capital retreat? There is a lot of capital sitting on the sidelines that has already invested into these funds, which can move very quickly to increase their investments.”

“There will be peaks and valleys but these will become more muted and the durations will be shorter, further enhancing its appeal. If some capital exits then reinsurance rates will harden and the ILS market will become even more attractive to pension funds,” continued Popkin.

For both investors and cedents the asset class will remain attractive, says Miller, underlining the benefit of transferring catastrophe risk to the capital markets via collateralised reinsurance or a catastrophe bond, for example.

Furthermore, entities such as JLTCM are dedicated to accessing the expanding capital markets in the most efficient way possible for clients, suggesting that the costs of participating in ILS continues to decline.

Popkin and Miller also note that liquidity in the catastrophe bond market also attracts investors to the space, as does the transparency of payments and the speed at which payouts can occur.

The market’s impressive growth in recent years, and the increased sophistication and maturity of its investor base, along with the increased acceptance of the asset class by insurers and reinsurers, suggests that it’s here for the long haul and market players would be wise to utilise its features to their, the market’s, and societies benefit.

Join Artemis in New York on February 3rd 2017 for ILS NYC
Artemis ILS NYC 2017

Artemis Live - ILS and reinsurance video interviews and podcastView all of our Artemis Live video interviews and subscribe to our podcast.

All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance video content and video interviews can be accessed online.

Our Artemis Live podcast can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.