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Greater transparency could encourage ILS sector growth: Deloitte


Greater transparency throughout the insurance-linked securities (ILS) and reinsurance linked investments sector could result in a broader investor base, drive further growth and enhance the asset classes’ reach, according to Deloitte.

“Transparency is an issue of great interest to both regulators and investors,” says Deloitte, underlining that from a regulator point of view there can be a “lack of transparency to cedents engaging in the transactions within the statutory filings, as well as which lines of business are covered.”

With the traditional 144A catastrophe bond market perhaps being the exception, as this division of the ILS sector offers enhanced transparency on pricing information, parties involved, risks covered and terms or conditions, the need for improved transparency in other ILS structures is something Deloitte feels would greatly benefit the market as a whole.

A growing element of the ILS space in recent times can be seen with the collateralized reinsurance market and cat bond lite (privately placed cat bond or ILS) deals, which, can enable investors access to a diverse range of perils across a broader range of geographies than perhaps witnessed in the traditional cat bond space, but come with less transparency that could be limiting sector growth.

“In general, both regulators and investors may feel more comfortable with more transparency, especially as it relates to risk and pricing,” explains Deloitte, in a recently published report looking at the impact ILS has on the global reinsurance landscape.

The above point raised by Deloitte, suggests that while sophisticated investors and sponsors that currently make up a large portion of the ILS space might well be knowledgeable enough to be comfortable participating in the space, ensuring they are extracting the most value from transactions and so on, greater transparency could encourage more investors, and perhaps sponsors, to enter ILS.

Those unsure of entering the market, or that do so but in a very small way and perhaps have a desire to be more meaningfully involved, “might eventually feel more secure diversifying into this asset class were there broader coverage by acceptable rating organizations,” notes Deloitte.

Greater transparency then, could lead to increased purchasing of investments and protection by sponsors, which in turn could result in a broader range of transactions being covered by rating agencies, something that Deloitte feels would grow investor confidence and ultimately the investor base.

Some large pension funds are restricted to only invest in securities with a rating, which can mean that accessing ILS directly as an asset class has become more difficult in recent years as the use of ratings has declined.

“If a broader group of investors view the ILS issuances as an acceptable and attractive asset class, demand for existing outstanding bonds would increase as new issuances would be unable to meet demand.

“This demand for existing issuances would potentially create greater price transparency, thereby having a knock-on effect of opening the asset class to an even wider investor base,” says Deloitte.

Broadening and diversifying the investor base could result in a more stable and sustainable market moving forward, explains Deloitte, highlighting that in recent times this has started to happen, with hedge funds and private equity investors increasing their share of a market that is typically dominated by pension funds.

Artemis discussed in November last year how the transparency of the 144A cat bond market has helped the ILS sector get to where it is today, and as highlighted by Deloitte, it’s likely this level of transparency will be required across the entire ILS landscape in order for the sector to reach its full potential, and broaden its reach.

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