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ILS is more than just an alternative to reinsurance: ILS Bermuda


In a clear demonstration of the maturation of the insurance-linked securities (ILS) market, participants at the ILS Bermuda Convergence 2014 event in Bermuda this week called for it to move beyond being considered an alternative to reinsurance.

ILS capital, catastrophe bonds, collateralized products and the risk transfer tools and techniques associated with this growing piece of the reinsurance market, are increasingly utilised by cedents as part of a holistic enterprise risk management approach to risk transfer, capital management and balance-sheet protection.

As the products, structures and most importantly the capital associated with ILS and insurance-linked investments grow and become more accepted the market would like to be considered a part of the overall reinsurance offering, rather than something which is alternative.

This has been a bug-bear of some in the market for a long time. Originally, when the ILS market emerged and actually before it was even known as ILS, instruments such as catastrophe bonds were considered a part of the world of alternative risk transfer, tools which offered an alternative way to offload risk to traditional reinsurance contracts.

The concept of alternative capital emerged much more recently, perhaps in the last ten years and while it does serve a purpose, in defining new sources of underwriting capital, it is perhaps time to phase out its use.

John Butler, Partner and Head of Sourcing at Zurich headquartered ILS manager Twelve Capital, commented on an industry panel at the event; “In five years I hope we’re not sitting here as a separate ILS conference, but as part of a reinsurance industry conference.”

Butler said that joined up thinking was required to further the ILS sectors growth and acceptance; “The more joined up we can be as an industry, the more we can do to increase insurance penetration in the global market.”

There has been a lot of discussion about the requirement to grow insurance penetration to provide opportunity for traditional reinsurance and ILS capital to both grow. ILS and third-party capital are seen as key assets that can help the insurance industry as a whole to grow its footprint to further narrow the gaps between insured and economic disaster losses.

Paul Jardine, Group COO at Catlin and Deputy Chairman of Lloyd’s, gave a keynote speech at the ILS Bermuda event. He suggested that ILS is now an important part of the market’s offering and he felt it is set to grow; “Clearly what we have now is about more than just cat bonds.”

Jardine spoke on the need for ILS to play a leading role in the future of reinsurance and insurance, where opportunity will lie to consider it part of a holistic reinsurance capital tower.

Finally, Cory Anger, Managing Director at GC Securities, the capital markets and ILS structuring unit of Guy Carpenter, said it was time for the ILS industry to be considered mature; “In 5 years, I hope this is not considered alternative capital anymore.” Anger said that it is time to stop calling it alternative capital adding the experienced practitioners in the space are now all reaching middle age.

These industry experts make a very good point.

ILS is far more than simply an alternative to traditional reinsurance. Rather it should be considered part of a rational, capital agnostic approach to securing the best quality reinsurance, risk transfer or risk financing protection that a cedent can access.

ILS has moved far beyond being a simple alternative to traditional reinsurance capacity. It is considered by many to be just another source, perhaps a more efficient and lower-cost one, of quality reinsurance capital and by some it is even considered to have added benefits that can make the capital superior in certain use-cases.

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