The insurance-linked securities (ILS) market has come around full-circle with the majority of insurers and reinsurers now embracing an asset class that is modernising insurance practices, according to industry experts and executives.
Speaking with A.M. BestTV at the ILS Bermuda 2018 Convergence event held recently, ILS market experts discussed how the ILS and alternative reinsurance capital sector is transforming the insurance industry.
“I think it started off by the insurance industry looked at the ILS industry as almost a threat, but as it has evolved the insurance industry is now saying, ‘well hang on a minute, we can actually take on this as part of our own broader capital strategy.’
“So, I think it’s come around full-circle and it’s almost gone from foe to friend, and most insurance companies and reinsurance companies, as part of their broader capital strategy, are now embracing an ILS strategy as well,” said Anup Seth, Managing Director of Aon Insurance Managers (Bermuda) Ltd.
It’s a valid point, as the majority of traditional players now either have their own ILS operation, or have partnered with an ILS player to leverage efficient and diversifying capital, a trend that is further highlighted by recent merger and acquisition (M&A) activity involving ILS players, such as the Markel – Nephila deal which is considered a game-changer for the acquirer.
Brad Adderley, a Partner in the Corporate Department in Bermuda at law firm Appleby, also noted the increased leverage of ILS capital and solutions by traditional insurers and reinsurers.
“How many commercial players, traditional reinsurance companies, have an ILS platform? Almost all of them. In fact, it’s a rarity if you don’t have one. So, that shows the importance of the ILS platform to those players. And, then, how many of them, also at the same time, have more than $1 billion under management? In fact, most of them have $1 billion to $6 billion.
“So, it’s real platforms and it is there for a reason. So, ILS, through the advent of cat bonds, sidecars, collateralised reinsurance, collateralised cat bond lites, have all exponentially grown, and it’s actually solving problems for the commercial players,” said Adderley.
Interestingly, John Seo, Co-Founder and Managing Principal at Fermat Capital Management LLC, explained that in his opinion, the most significant impact ILS is having on the insurance industry is that it’s modernising practices.
“So, what ILS are, as the term implies, is securitisation. And the insurance industry has been so efficient and impressive for 300 years that it’s actually managed to grow without any securitisation. But if you look at every other financial service in the world, it’s very heavily reliant on securitisation and all the modern practices that come along with that.
“So, what I think is the biggest impact of ILS on the insurance industry, is that it’s introducing securitisation practices, which is a very modern financial practice and requires a lot of updating,” said Seo.
Other market participants noted the impressive rise of the ILS space over the last two decades, stating an expectation of further growth driven by ample opportunity across various peril regions, both existing and new.
“It seems to have kind of a stabilising role, and in a way it is bad for us because it dilutes returns. On the other hand, it’s quite good for us because the market develops, and it’s good to see it develop,” said Stefan Shulz of Hannover Re.