For casualty risks to become a meaningful part of the insurance-linked securities (ILS) and catastrophe bond market, transactions need to be structured in such a way that investors can see a clear exit point, according to Chris Parry of Aon Securities Limited.
Parry was speaking during a panel discussion at an event held in London this morning by insurance and reinsurance services, analytics and data group Verisk Analytics.
Parry insisted that the key to making casualty risks accessible to capital market ILS investors is to structure transactions or facilities in such a way that investors can relinquish responsibility for the risks at the end of the deal term.
“The challenge is obviously the duration of the transaction,” Parry explained.
He acknowledged that while investors are not all clamoring for access to casualty or liability type exposure, demand is beginning to build.
Parry continued; “There is limited scope in terms of investor appetite at the moment, but there is definitely pockets there.
“I think as we see more of these transactions coming to the fore, I think that market will certainly develop. But certainly the duration is the biggest hurdle with those types of transactions.”
In order for casualty ILS deals or cat bonds to catch on they must provide investors with “clear visibility of the exit point,” Parry explained.
He added that one sticking point could be liquidity, when clarity of the underlying exposure to losses may not be as clear as it would be with shorter tailed lines.
Casualty risks are typically long-tailed, with durations and liabilities sometimes going into the decades. Investors want to access the returns of this business, it is diversifying and can have an attractive return potential, but they certainly don’t want to lock their capital up for as long as the tail could last.
So ideas like a defined way to exit the deal, whereby the risk could be taken back by the sponsor, passed to another specialist or perhaps even the deal renewed if the investors wanted, are likely to be key features of any casualty catastrophe bond or other ILS structure that comes to market successfully.
A transaction could be structured as a security like a catastrophe bond, with up to a seven year term and a pre-determined commutation mechanic within it, to allow the investors to exit the business at the end of the deal’s duration.
As ILS investors increasingly look for new risks to diversify into it is likely that casualty risks will find their way into the market in growing volumes. Casualty reinsurance is considered a growing area and it’s natural that some of the alternative capital that is available begin to find its way into those risks in a more meaningful way than what is currently being seen.