Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Faster information flow would help ILS secondary trading efficiency


Speaking at the recent SIFMA IRLS 2018 conference in Miami, insurance-linked securities (ILS) market participants and experts highlighted the benefit of increasing the speed of information flow to the market, something which could help the secondary market operate more efficiently when disaster strikes.

In light of 2017 catastrophe events, a panel of ILS participants discussed the secondary market for catastrophe bond trading, with a focus on the importance of loss reporting and the benefits of increased speed-to-market in order to help the market reach a “fair price point.”

“One of the feedbacks I get from investors in the space, is that a lot of this is also a function of information flow. And I think it is fair to say that those transactions that tended to have the higher frequency of information relating to loss determination, tended to find the market’s clearest point faster than those for who maybe the loss development process was slower,” explained Rishi Naik, BNP Paribas’ Head of ILS Sales and Trading.

He continued to explain that one of the lessons from 2017 might be to try to increase the speed at which loss information during an event reaches the marketplace, regardless of how preliminary.

“We all understand that sometimes very early in the process the data ca be extremely preliminary, but again I seem to get the sense that some information, even just the roughest, is better than a void,” said Naik.

The complexity of the loss events in the second-half of 2017 resulted in some uncertainty in the catastrophe bond market, both as the events started to unfold and in the weeks after, and particularly for aggregate structured deals.

This complexity filters through the market and has an impact on the secondary market, including pricing, and panelist Steve Emmerson, Head of ILS & Insurance Desk at Tullett Prebon Group, noted the combination of this with the differing views of investors in the secondary market during an event.

“We’ve got the aggregate deals and some of these include wildfire, severe thunderstorm, U.S. wind and quake, and if they’re aggregate as well, and there’s this uncertainty, then obviously there’s going to be a lot of pricing volatility.

“It really is in the early stages anyone’s guess, as to whether a bond will be triggered and if triggered is it going to be toast or not, basically. It comes back to a pricing point of view. It’s very complex and obviously the flow of information is ultimately underlying losses, and is continuously evaluated by buyers who all have slightly variable views,” said Emmerson.

The maturity and sophistication of the ILS investors base was highlighted by the response of the market to recent events, and panelist Liran Nehushtan, Vice President of ILS at reinsurance giant Swiss Re’s Capital Markets unit, explained that while investors in the space are very good at what they do, “there are a few issues within certain bonds that can lead to a surprise.”

He continued to explain that this could be “the threshold for when they have to report with some bonds.

“Like with the wildfire losses, there was a build-up in an aggregate deductible that was eroded but the underlying sponsor perhaps didn’t have to report as early as investors might have liked.

“So, I think to the extent that the reporting could be a little better or a little more uniform, I think that would help, and that would also help with maybe bringing in the disparity between the different structures out there,” said Nehushtan.

He added that going forward, the experience of 2017 and the lessons learnt is likely to result in differences with where aggregate and per-occurrence prices go, driven by increased awareness of the impact “frequency and aggregate bonds can have on a portfolio.”

Naik, said: “Some of the points that have been highlighted throughout this presentation are access to information, frequency of information, and improvements in loss reporting.

“All of this helps the market reach a fair price point and ensures an efficient secondary market and the ability to move the market from disruptive events. We all understand that in 2017 the market was resilient, and the response from market participants was extremely mature, that said, there are always to improve market structure.”

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