Duperreault sees “huge potential in ILS at AIG: Report

Brian Duperreault, the CEO of insurance giant American International Group (AIG), said yesterday that he sees “huge potential” for using the insurance-linked securities (ILS) market more at the firm.

Leveraging the capital markets and ILS structures is fast becoming a differentiator not just for reinsurance firms. Now, major global insurers are also finding ways to better match their risks with efficient capacity backed by third-party investors from the capital markets.

Duperreault has said before that he expects AIG will be a predictable buyer of reinsurance and look to reduce its exposure to frequency catastrophe events and better manage its overall natural catastrophe exposure.

Leveraging ILS structures such as catastrophe bonds, as well as its now in-house expertise of the AlphaCat Managers ILS unit it acquired with the Validus buy, now look set to become increasingly important to AIG, according to Duperreault’s words.

Reuters reported that Duperreault said he sees “huge potential” for the use of insurance-linked securities (ILS) within AIG’s portfolio, while speaking at the KBW insurance conference yesterday.

He called ILS a “good tool” for managing catastrophe exposures, providing alternative sources of capital to cover claims, and said “I think you’re going to see more of it” at AIG.

Duperreault also reportedly said that the ILS market could be useful over time to the insurer, which suggests that we shouldn’t expect an immediate rush to issue cat bonds, or leverage other sources of alternative reinsurance capital.

But it’s clear that Duperrault buys into the efficient protection that ILS can offer and he also recognises the importance of having expertise in-house to manage third-party capital in AlphaCat and attach it to reinsurance risks, hence the acquisition of Validus was viewed so positively, through an alternative capital lens.

AIG could stand to increase the efficiency of its own capital through a symbiotic use of ILS capacity to take cost-heavy catastrophe risks off its balance-sheet, utilising the capital markets as a lever for growth and PML protection.

And that’s just the start, as with a portfolio the size of AIG’s there are numerous avenues the insurer could follow to bring the capital markets more directly into its underwriting capital structure.

AIG has been an innovative user of catastrophe bonds in the past, not least with its one-year parametric Compass Re II Ltd. (Series 2015-1) U.S. wind catastrophe bond and the multi-peril, multi-year Tradewynd series of cat bonds, with Tradewynd Re Ltd. (Series 2014-1) being the most recent.

It would be encouraging to see the insurer return to the market, a move the ILS investor base would no doubt welcome.