ILS fulfils original purpose, should now target top risks: Hilti, ILS NYC 2021

Niklaus Hilti, Head of insurance-linked securities (ILS) at Credit Suisse Insurance Linked Strategies, has commended the success and growth of the asset class over the past decade, but warns that in order to maintain this positive momentum it will need to address the world’s largest risks.

During the second session of the fifth annual Artemis ILS NYC 2021 conference, which this year is being held virtually and online, Hilti explored both the past and next decade of the ILS sector, including catastrophe bonds, sidecars and collateralised structures.

“On the cat bond market side, to a certain degree, the market has probably fulfilled the original idea of bringing capital to the insurance and reinsurance industry, where the industry felt initially in the 90s that the reinsurance market is maybe not capitalised enough to be able to absorb some of the shock events around natural catastrophes,” said Hilti.

The market was initially established to provide insurers and reinsurers with additional capital to enable large loss events to be absorbed, and the reality is that to this day, it remains heavily focused on peak natural catastrophe risks, and notably Florida wind.

Of course, more exotic and diversifying exposures and territories have helped the sector expand since this time, something shown by the record year for catastrophe bond issuance in 2020, both in terms of the number of deals and the volume of new risk brought to market.

“I think we of course can grow another 10% or 20% over the next couple of years on the cat bond market, but I think it fulfilled the idea, the purpose here in combination with the collateralized and the broader ILS market,” continued Hilti.

Current market conditions suggest that it could be an active period for the cat bond space over the next 12-24 months, something which is more typical in a hardening market environment.

However, if the marketplace wants to continue the impressive momentum gained over the past decade, Hilti suggests that cat bonds and the broader ILS market will need to look seriously at the world’s largest and most systemic risks.

“Recently I’ve seen a lot of people saying that pandemic risk is not insurable. I’m always a bit puzzled. I understand that it is not insurable because it’s a huge risk but on the other hand, I think this is exactly where growth should be for the insurance industry.

“The very critical risk is about pandemic risks, it is about possibly life, mortality, longevity risk, big trend risk. It can be cyber, again, this is also a risk which is very, very large and it is almost impossible to diversify the risk,” he explained.

Adding, “But, I think the industry and I mean the insurance industry, needs to pick up that risk and then be able to transform that into the capital market. And, I think then the overall capital market including the cat bond market will grow.

“This is the whole point about the cat bond market and the ILS market; it brings capital to areas where the insurance and reinsurance industry is struggling to absorb the risk or the type of events which are out there.

“I personally think the whole pandemic situation we are in, it shows that this is one of the major natural catastrophes, if you will, which is almost crying for insurance solutions helping to take away that volatility on the PML of commercial and private business owners. And, I think that is a huge opportunity actually for the insurance industry but also for the ILS industry in the long run.”

The session, which was broadcast first to registrants on Friday 5th Feb, can now be viewed below:

Every session from ILS NYC will be made available more broadly via our Artemis Live video channel and audio versions will also be shared via our podcast as well.

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