For some primary insurance sponsors of catastrophe bonds, insurance-linked securities (ILS) and other alternative sources of reinsurance capital it’s the fully collateralized nature of the products which will keep them coming back for more.
Earlier today we wrote that the ILS market clearly has room to grow if it can encourage primary insurers, for many of whom reinsurance counterparty risk is a key concern, that it has the staying power to be there when claims need paying after major losses and that it has the appetite to support their reinsurance needs on a long-term basis.
Some insurers don’t need convincing though, with their first foray into the market helping them to develop a taste for the fully-collateralized side of reinsurance protection, which to some degree removes counterparty concerns. As well as the fact that the reinsurance protection is collateralized, the efficient nature of ILS capital means that some insurers are likely to increasingly tap the capital markets for growing higher layers of their protection.
A good example of this is mentioned in this Business Insurance article. The article quotes John Tholen, vice president of reinsurance for recent first time catastrophe bond sponsor Great American Insurance Co. and his comments show that the collateral is what really matters for the levels of protection his firm seeks from the ILS market.
Great American Insurance sponsored its first catastrophe bond in March, with the $95m Riverfront Re Ltd. (Series 2014-1). Tholen told a panel at a recent conference that the fully collateralized nature of alternative reinsurance capital was a key factor that encouraged his firm to tap the ILS market for the first time.
“For us, it was the collateral,” Tholen is quoted. He went on to explain that the potential capital from ILS investors such as pension funds meant that they could provide larger limits than are possible from the traditional reinsurance market.
Tholen then commented that the ILS market is likely a core component of the Great American Insurance reinsurance program for the forseeable future. He said that Great American Insurance will continue to leverage traditional reinsurance capital for exposures below the $100m mark, but for the larger exposures the use of catastrophe bonds and collateral was likely to continue.
The shift towards indemnity triggers is also cited as one of the attractions for Great American Insurance, providing it with comparable cover to its previous traditional protection at that layer in its program.
Finally, Tholen also said that the broker structured model of ILS is perhaps more efficient than the direct model. Great American appreciates the greater role of the reinsurance broker in arranging and structuring ILS transactions, which is a good point that doesn’t often get discussed. The role of the broker is key in reducing friction for issuers of ILS and while some might suggest brokers have in the past been overpaid for this work, with costs to issue down the support and skill of ILS and capital market brokerage teams is hard to doubt.
So for some insurers the ability of the ILS market and investors to pay claims, as well as be there to support its reinsurance needs after losses, is not in doubt. It is the specific qualities associated with catastrophe bonds and ILS, of full collateral and efficient structures, comparable to traditional reinsurance, that is the real attraction.