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Dynamics set for substantial ILS market growth: John Seo, Fermat Capital


Insurance-linked securities (ILS) capacity is helping to fill the disaster gap left by the traditional insurance and reinsurance industry, with dynamics set for “substantial ILS market growth” in the future, according to John Seo, Co-Founder and Managing Director of Fermat Capital.

John Seo, Fermat CapitalThe volume of ILS capital now makes up roughly 20% of dedicated reinsurance capital, and its value has again been highlighted following another year marked by natural catastrophe events.

Seo, writing in a recent article for asset manager GAM Investments, noted that ILS market returns are driven by a mismatch between reinsurance regulation and the demand for insurance protection as a result of growing wealth, the growing population, and rising asset values in areas increasingly vulnerable to natural disaster events.

Insured property values have historically doubled every decade, says Seo, meaning that while re/insurance capital might be sufficient to manage normal disasters, for larger, unexpected events, ILS capacity is needed.

“It is clear the (re)insurance industry – while adequately capitalised for normal disasters – is grossly under-prepared to meet the cost of remote but potentially devastating catastrophic disasters that are now possible today, let alone meeting the increasing demand for insurance to cover risks that are currently under- or uninsured,” says Seo.

The result is a disaster gap which resulted in an increased demands for reinsurance protection, but Seo notes that regulatory and rating dynamics mean that establishing a new reinsurer to meet demand, is no longer competitive.

“With demand for risk capital outstripping supply, this large gap left by the (re)insurance industry may create a compelling opportunity for a capital markets solution,” says Seo.

Data from the Artemis Deal Directory shows that catastrophe bond issuance in 2018 is again set to break records. The market has expanded its remit in 2018, with the first pure wildfire risk deals brought to market, as well as growing number of ILS deals covering mortgage insurance risks.

Alongside expanding in peak peril regions across the world, organisations such as the World Bank and FEMA have utilised the capital markets in recent times, with potential for further leverage of the ILS market in the future.

“While these instruments currently only penetrate a small fraction of the risks in the present-day disaster gap, with limited opportunities for new capital formation within the traditional reinsurance sector in contrast to accelerating capital need, the dynamics are set for substantial ILS market growth ahead,” says Seo.

So, it’s clear that opportunities are there for the ILS market to increase its role and influence in the reinsurance space, while assisting with the expansion of insurance in both mature and emerging marketplaces.

“ILS represent a valuable and growing source of structural capital to this world problem, helping to protect the homes and livelihoods of people around the world and building more disaster-resilient societies.

“In return for accepting a share of the disaster gap solution, we believe investors can have a measurable beneficial impact on the quality of people’s lives, while potentially generating attractive risk-adjusted returns with the added benefit of genuine diversification from more traditional return sources,” says Seo.

Register today for ILS NYC 2023, our next insurance-linked securities (ILS) market conference. Held in New York City, February 10th, 2023.

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