Growth of the insurance-linked securities (ILS) market is not as assured as it might seem, with a number of potential threats to it. But Tom Johansmeyer, Head of PCS at Verisk, believes there is plenty of opportunity for ILS expansion, with specialty retrocession one clear area for ILS market growth.
Speaking with Artemis around the time of the Monte Carlo Rendezvous gathering in 2022, Johansmeyer highlighted a number of potential hold-ups to ILS market growth.
While the catastrophe bond market has grown strongly over the last couple of years and collateralized reinsurance market confidence is increasing again, as past loss years are increasingly moving into the rear-view, as ever events could change the growth trajectory of the ILS market very quickly.
On the potential for further ILS market growth as we move into 2023, Johansmeyer told Artemis, “It’s always difficult to say, particularly given the quiet hurricane season we’ve had so far and the potential for it to intensify quickly.
“The possibility for ILS market growth in general could be constrained by further loss activity, which could take a harder market and threaten to calcify it.
“In the retro market, if the cost to transfer risk goes high enough to change underwriting behavior – to include writing less, writing differently, or otherwise reducing the need to hedge – then that could impede ILS market growth as well.”
But retro could also be an opportunity, especially on the specialty side if losses from recent global events end up eating into capacity and layers once they crystalise.
Johansmeyer said, “After the impact of the conflict in Ukraine, which is still evolving, the notion of writing unhedged seems more difficult to justify than a year ago, with specialty retro having demonstrated its value since the end of February.”
Johansmeyer and his team at PCS, part of Verisk, have been working to provide data services to the insurance, reinsurance and ILS market which could promote expansion of ILS capital into new areas of risk.
Specialty lines has been a focus, with PCS already a significant provider of data in the property catastrophe space, including to industry-loss triggers for catastrophe bonds and other risk transfer structures.
So, it’s not surprising that Johansmeyer believes the opportunity for specialty expansion persists, while he also sees market forces suggesting this opportunity may be one that is growing as well.
“The specialty retro market has been one of the most frustrating opportunities since the beginning of 2022. Demand has been high, and there have been pockets of willing capacity. However, the delta in expectations has been problematic.
“Trying to attach a property per risk ILW at $1 billion is a thing of the past, and seeking to get all-perils cyber retro from the ILS market is equally unrealistic.
“Strike, riot, and civil unrest ILW trigger points of $2 billion – which we hear about too often – are not “above the fray” as they once were,” he told us during his interview.
So there’s demand for protection that is perhaps growing and current macro-forces such as inflation and the fall-out of events in Ukraine could accentuate that.
While on the other side, interest in accessing insurance and reinsurance linked returns from new lines of business is also seen to be growing among some investors in ILS and end-investors interested in the ILS asset class.
Overall, Johansmeyer believes there’s potential here, but matching demand and supply is the key.
“There is plenty of potential for specialty trades to clear, and once buyers and sellers can find a place to meet in the middle, we see lots of potential for market growth.
“It’s just a matter of readjusting expectations to a changing market,” Johansmeyer commented.