Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

ILS market performance through pandemic to drive public sector interest


The insurance-linked securities (ILS) market has performed admirably through the COVID-19 pandemic, demonstrating that the capital markets remained largely open for transfers of risk and that even under extreme risk scenarios ILS investors can be relied upon to support protection buyers need for risk capital.

light-ideaThis bodes well for the future use of ILS as a mechanism for transferring risks to the capital markets by governments, municipalities and public sector entities, who will look favourably on the resilience of the ILS sector and the ability of the catastrophe bond market in particular to continue trading right through the most volatile financial market seen in years.

The ILS market and cat bonds have once again shown their resilience to financial market declines, which is a positive for the asset class going forwards as it underscores the diversification opportunity, instils more confidence in potential sponsors and also attracts more investors.

But much bigger than this, the fact the ILS market continued to operate effectively, with transactions brought to market and issued around the pandemic’s peak and only a short hiatus in issuance being seen, drives home the fact it is a capacity source that potential sponsors such as governments around the world can rely upon.

When making decisions on disaster risk transfer, governments and public entities are looking for capital and capacity sources that can be long-term partners and be relied upon to be there even when the worst incidents occur.

By navigating the pandemic effectively with little hindrance or impact to sponsors ambitions, the ILS market has shown its ability to stay open and available, to allow public sector entities and governments around the world to continue planning for and accessing risk transfer capacity.

Insurance-linked securities (ILS) are acting as a reinforcement for the global insurance and reinsurance market, taking on peak catastrophe peril risks and enabling them to be transferred into the deepest and most liquid pool of capital available, the global capital markets.

This was a key motivator behind the creation of the catastrophe bond, to tap into that deep and liquid pool.

But for public sector entities that are looking to this as a potential opportunity, the now gathered evidence that ILS investors are committed even through a global crisis like the worst pandemic in decades, will help to instil greater confidence and ultimately rising interest in the ILS market and cat bonds as an asset class.

Alongside this, as we’ve been saying since the beginning of the COVID-19 pandemic, this shared experience of a global crisis has served to heighten risk awareness and also risk aversion, making people, corporations and public entities more attuned to their risks and more likely to look to risk transfer and insurance.

This is being evidenced across different areas of risk transfer, as well as in financial markets in terms of savings activities.

There is a clear rise in the awareness and understanding of risks being retained that is likely to drive more risk transfer over-time and public sector entities as well as governments are perhaps the most attuned to this, having taken on the significant costs of a pandemic in recent months.

Structurally, the costs being borne to pay for the pandemic are also driving deficiencies in other budgets across the public sector, which may also lead governments and public entities to look more closely at risk financing and risk transfer, to protect themselves against other risks that could drive large costs at this time.

The insurance-linked securities (ILS) structure itself offers significant opportunities for public sector entities, municipalities and governments to secure financing linked to their experience of natural disaster and severe weather events, of course.

But it also offers a way to secure insurance-related coverage for other risks they may hold as well, in particular climate change linked exposures that may drive costs further down the line.

As the ILS market demonstrated its performance through the pandemic, it has also sparked ideas in some circles about how a market in longer-term instruments, linked to climate experience and risk itself, could be created to help public entities transfer the budgetary risks of creeping climate change impacts.

We, at Artemis, are seeing growing interest in the ILS asset class, especially in the catastrophe bond, at this time, evidenced by a growing readership and increased inbound enquiries.

But most interesting are the increasing enquiries from people asking “can the ILS market help me with this,” which suggests opportunities to innovate are perhaps greater than ever in the ILS sector right now.

Which brings me back to the heightened risk awareness and aversion, which is driving greater motivation to manage risk around the globe as well.

As ever, the insurance and reinsurance sector more broadly has an opportunity at this time to clearly explain the important role it plays in shoring up global economic activity and prosperity.

Alongside that, the ILS market has an important message to send as well, as a source of liquidity that can underpin global insurance and reinsurance markets and help them better manage peak peril risks, so they can do more to help consumers.

There’s also the cost-of-capital argument, of course, that ILS markets are helping re/insurers to manage and lower their costs-of-capital, ultimately creating efficiencies that should be passed on to the risk transfer buyer.

An abundance of positive messaging for anyone looking at managing risks and transferring them away, to protect finances and public budgets through this still very challenging time of a pandemic.

Beyond the pandemic, the opportunity is perhaps even clearer.

Governments and public entities need to focus on their resources, financing and their own liquidity, to be able to deliver what society needs as it comes out of a pandemic.

Hence, transferring away risks that are often too big to bear on their own is only likely to become more of a strategic priority, putting the ILS market and catastrophe bonds in the frame as potential solutions.

Making it a good time to discuss the benefits of ILS capital as a risk transfer vehicle, as well as insurance and reinsurance as societal volatility buffers, which together can provide the layered risk financing that economies and governments need as they emerge from the COVID-19 crisis.

Register today for ILS Asia 2023, our next insurance-linked securities (ILS) market conference. Held in Singapore, July 13th, 2023.

Artemis ILS Asia 2023 - Insurance-linked securities conference in Singapore

Get a ticket soon to ensure you can attend. Secure your place at the event here!

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