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ILS market top opportunities & concerns revealed in BDA survey


The evolving insurance-linked securities (ILS) sector continues to present both challenges and opportunities for participants, with respondents to a recent ILS survey highlighting competition as a threat to sector growth.

Meanwhile, new products, new geographies, and innovation were noted as just some of the potential opportunities for the space, both now and in the future, by the Bermudian ILS market survey participants.

The survey, which was commissioned by the Bermuda Business Development Authority (BDA), includes responses from 24 companies that are involved in the Bermuda ILS space, and aims to provide insight into the development and workings of ILS operations in Bermuda and beyond.

As we wrote on the launch of the survey results, the BDA found that the impact of the ILS market on the economy of Bermuda is significant, underlining its important contribution to the economy, alongside the islands leading reinsurance industry.

A report derived from the survey results, reveals that on average survey respondents are optimistic about the future of the global ILS marketplace, with the average response being four out of a possible five (with five being the most optimistic).

A section of the report explores the top five opportunities and challenges that are facing the global ILS market, and with Bermuda being one of the leading domiciles across the globe for ILS business, a global issue or prospect is most likely a Bermudian concern too.

“The biggest opportunity was identified as developing new products that can be accessed by ILS funds. The biggest risk was thought to be the current supply/demand imbalance in the market,” says the report.

With competition in the global reinsurance industry remaining intense it’s unsurprising that survey respondents highlighted the persistent supply of capital, from both traditional and alternative sources, as a top risk for the ILS market.

However, it’s worth remembering that what’s viewed as a risk can often be an opportunity for the market and its participants also.

It’s no secret that a lack of large losses in recent times, coupled with the high volume of third-party investor backed capital entering the re/insurance space, has seen supply outweigh demand in a rapidly changing marketplace.

But as we’ve explored before at Artemis and a view some market experts and executives have expressed through the softening landscape, it could be that a lack of demand is exacerbating this, and not simply the excessive supply of capital.

According to the survey results, the top two ILS growth opportunities are seen as the development of new products and the entry of ILS into new territories. So there’s a belief that the oversupply of capital could be mitigated somewhat should the right kind of innovation enable the development of new solutions that supports risk transfer in new peril regions.

Not only will this provide vulnerable, underserved regions of the globe with much-needed protection against natural and man-made disasters, but it will also facilitate the expansion of ILS, ultimately requiring more capacity and therefore utilising some of the capital that’s contributing to the current supply/demand imbalance.

Of course, for ILS to play a meaningful role in certain peril regions, modelling capabilities, regulatory hurdles, and other local and global financial/economic issues also play a part. But it’s important to remember that with vast exposures such as terror and cyber on the rise, the current supply of capital is likely insufficient for the potential losses.

Beyond the expansion into new territories, which includes helping to bridge the protection gap (difference between economic and insured losses post-event) in places like Asia, and the development of new products for underserved risks and growing exposures like cyber, how ILS reacts post-event was a key feature of survey responses.

The post-event performance of ILS was actually seen as the second most pressing, global concern for the ILS market, but it also ranked as the fourth biggest opportunity for the sector.

There have been numerous discussions and industry opinions surrounding the permanence of ILS capital, with some in the sector highlighting that the wealth of ILS capital remains largely untested in the face of a large loss event.

The untested structures, potential issues with trapped capital, and unanticipated structural failures of ILS solutions were underlined as concerns for how ILS might react post-event.

However, respondents also said that the resilience of ILS would be seen after the next large loss, which in turn should reduce much of the scepticism regarding its longevity in the catastrophe re/insurance industry. Furthermore, there could be an increased demand for reinsurance and ILS protection post-event, especially if it’s a truly market turning loss, and the expected willingness of third-party investors to deploy in the sector should further highlight the market’s maturity.

Disruptive innovation, which includes increasing efficiency by seeking to get closer to the original source of primary risk, the potential for heightened transactional efficiency brought about by technological advances, and the overall improved efficiency of risk transfer, was seen as the third biggest opportunity for ILS.

On the other end of the spectrum, and as mentioned briefly earlier in the piece, survey respondents feel that regulatory and tax law changes could also hinder ILS market expansion and development.

Investment performance of ILS and an increase in demand as a result of higher solvency requirements, were also seen as opportunities for the sector.

Other risks for the global ILS space moving forward, according to the BDA survey responses, includes the potential deterioration of the global economy and local economies, which ranked fourth on the list. Risk quantification came fifth on the list of concerns for the global ILS market, which includes potential issues with investors not fully understanding the exposures, and the potential inclusion of poorly, or un-modelled risks, like flooding in parts of the world and cyber.

The ILS market continues to expand and the investor base has shown signs of increased maturity and sophistication through the challenging re/insurance market times.

As the market evolves alongside the changing risk landscape it’s likely that the concerns and opportunities for ILS players will adapt also, and survey’s like this from the BDA help to provide a view of the current operating landscape.

The full survey report can be downloaded here (PDF format).

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