The varied structures and growing maturity of the insurance-linked securities (ILS) market has the potential to unlock new sources of risk, but innovation and a willingness to venture into the unknown is required, according to ISO’s Tom Johansmeyer.
Many risk transfer market players have reported a continuation of the industry pressures witnessed throughout 2015 at the key January 1st 2016 renewal period, citing price declines, competition, and ample capacity.
And while some in the insurance, reinsurance and even the ILS space in more recent times have embarked on some form of merger and acquisition (M&A) activity to increase scale, relevance and profit potential, the entry into new, or underserved regions and risks remains the catalyst for what’s currently perceived as limited organic growth opportunities.
Assistant vice president, Reinsurance Services at ISO Tom Johansmeyer notes, in a recently published white paper titled ‘Original Risk, Tempted by Sustained Profitable Growth?’ that the “reality is that the global reinsurance and ILS community is exceptionally adept at getting even better at what it already does well – succumbing to the temptation of the status quo rather than the possibilities beyond the garden.”
A valid point, and one that highlights the potential for ILS and reinsurance to access risks in mature but underserved markets, like Florida and California, emerging risks in developing markets, like the Asia-Pacific, and for the future risks that the market is currently unaware of.
Entering the unknown, notes Johansmeyer, has its risks, but a greater involvement and willingness of ILS market players to innovate structures and solutions to access a broader range of geographies and risks, can greatly enhance a company’s relevance, while also providing protection to those who need it the most.
Johansmeyer explains that the ILS markets ability to source new risks provides the firms that take the initial step with numerous benefits, including minimising reliance on mature markets, which in current market conditions are underlined by high levels of competition and pressured returns.
Furthermore, ILS players that embark on new, innovative ventures focused on new or undeserved risks, stand to “define new markets, which helps turn first-mover advantage into sustainable leadership.”
And; “Secure the loyalty of early market entrants and capitalize on their future willingness to grow into large, significant, and influential clients. Deliver the types of profitable growth that lead to disproportionate shareholder value gains,” and finally, “win new talent thanks to a demonstrable track record as an innovator – and as an organisation that necessarily invests in its people to reach exciting results,” explains Johansmeyer.
Industry commentary from insurance, reinsurance, and ILS fund executives and analysts have often noted the inability of alternative reinsurance capital to have any meaningful influence outside of the highly competitive property catastrophe landscape. With the majority of discussions underlining the lack of adequate modelling capabilities in business lines such as casualty, and nat cat exposures in emerging regions, as a key reason ILS capacity has failed to significantly broaden its reach.
But while third-party reinsurance capital has been in the market for some time, it’s only in the last few years that it’s really started to gain an influential share of the overall reinsurance pie, and the sophistication and understanding of the sectors investors and sponsors has grown also.
Add to this the fact that catastrophe modelling techniques are developing and improving all the time, as the entire risk transfer world commits to tackling the threats of climate change and the growing insured-economic loss protection gap, it is possible for ILS market players to begin making inroads in order to source new risks, to better serve and protect those in need, and boost profits at a time of continued market turmoil.