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Original Risk: A Society for Change Agents

Common language, standardisation can unlock non-cat ILS market


A consistent flow of information, which incorporates a common language throughout the transaction chain, is vital for meaningful insurance-linked securities (ILS) participation outside of the natural catastrophe space, according to industry experts.

ILS NYC 2021 panelWith both cedents and investors increasingly looking to expand the area of activity for the ILS asset class, day three of Artemis’ fifth ILS conference in New York City had a focus on spreading the word of alternative capital beyond catastrophe risk.

“We think there’s growing interest in diversifying risk into this space if structured properly and pays fairly,” said Matt Beard, Managing Director at reinsurance broker Guy Carpenter.

“The property ILS market has become a matured stage now, which we think is a positive for this non-cat ILS space. You have a lot more funds, pension funds and hedge funds out there that are comfortable with insurance risk because of the property space being mature, and now that is naturally spilling over into the non-cat ILS space,” he added.

According to Beard, the key to getting capital markets-backed capital into longer tail lines of re/insurance business, is “finding a common language” where both the investor and the cedent understand the pain points for each deal and party.

“We think the market is maturing to where that’s becoming a reality and becoming more repeatable, and both sides understand each party at the table to help grow that…So, absolutely this capital seems to be growing in the interest for this type of transaction, and certainly seems to be suited to take advantage of the efficiencies that will be created,” said Beard.

In the mind of panellist Thibaut Adam, Managing Director at financial services giant Citi, the expansion into non-cat ILS will be slow and steady. Although, he added, it’s clear there’s no shortage of capital willing to be deployed.

“Having a standardised product, and a standardised modelling view is very important. So, perhaps we need to look at the next simpler structure. I think mortality is in itself quite attractive. It’s a risk that everybody understands and I think you’ve got a good diversification benefit.

“I think with modelling firms and people like Vesttoo working in conjunction with rating agencies, we could have a more standardised view of that risk, which should be beneficial to all. But, I think, the market, and I’m talking about the primaries, I’m talking about the reinsurance providers, they have to embrace this as well,” explained Adam.

“So, I think the support of the industry, probably more than anything else, is a key enabler,” he added.

Alongside standardisation, Kenneth Durbin, SVP at Guy Carpenter, noted that key components for what exposures meet the criteria for ILS market appetite would be, “one, if the underlying risk is uncorrelated to the equity markets, and two if the exposures can be modelled with an industry standard approach”.

“Exposures that meet those criteria tend to have a relatively short tail, but we’re seeing that be expanded into some longer tail lines,” he continued.

Outside of the nat cat arena, there’s a host of lines of insurance business tipped for potential ILS participation in the future. One such avenue is the longer-tail life segment, and specifically the use of the capital markets by life insurers to monetise the value in force of their portfolios.

Interestingly, this is an area which Vesttoo, a gold sponsor of ILS NYC 2021, has been exploring in recent times and, during the panel the company’s Co-founder and Chief Executive Officer (CEO), Yaniv Bertele, discussed how technology can transform this marketplace.

“Specifically associated with the long-tail type of transaction in the value in force space, the technology is essential, both in terms of stochastically projecting it, but being able also to create a flow of information between the cedent, the provident fund, the pension scheme, the bank or the buyer and the intermediaries.

“So, accuracy of data, projection capabilities, accurately modelling excess mortality and lapse is extremely important for a successful value in force transaction,” he explained.

Adding, “All in all, we believe that a transaction is enabled, starting with creating an objective common language between the insurer and the capital markets at the lowest common denominator basis. Not using high words, insurance terms nor financial terms, getting to a point where all sides can agree on a common language and objective, independent risk modelling that accurately takes into account all perils of risks.”

The session, which was broadcast first to event registrants on Tuesday 10th Feb, can now be viewed below:

Every session from ILS NYC are available more broadly via our Artemis Live video channel and audio versions via our podcast as well.

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