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ILS “shouldn’t be fighting over a static pie,” – Cory Anger, Guy Carpenter


Despite impressive growth and increased maturity of the ILS market in recent times Cory Anger of GC Securities, feels that in order to mitigate the intensely competitive catastrophe re/insurance markets, alternative reinsurance capital products must expand and broaden their reach.

For various reasons, which include limitations with risk models, a lack of local market knowledge and difficulties in entering certain markets, the large majority of alternative reinsurance capital has in the past, and continues to struggle to find a home outside of the highly competitive property catastrophe space.

As a result of its focus and persistent entry into this area of the global re/insurance marketplace, rates in property catastrophe business lines have experienced the most severe rate declines in a sector that’s being squeezed from all angles.

“We shouldn’t be fighting over a static pie; this really should be about that there are many cat-prone areas globally, but also specifically in developed areas that still are woefully underinsured,” said Anger, Global Head of ILS Structuring at GC Securities, during the recent Artemis SIFMA IRLS Executive Roundtable 2016.

“The product itself that alternative capital provides needs to expand and broaden. We need the alternative capital market to move to all natural perils, but the next point, once we get there – I do believe this market will move to all natural perils – it is a question of how and when do we expand beyond there?” continued Anger.

At the end of 2015 numerous industry observers and experts noted the continued growth of the alternative reinsurance market, as it continued to expand its presence and claim an increasingly larger slice of the overall reinsurance market pie.

In fact, reinsurance brokerage Willis Re stated that alternative capital amounted to $70 billion at the end of last year, an increase of 21% that ensured total reinsurance market capacity grew to $427 billion, as traditional capacity alone fell by 3.5%, to $357 billion.

While this continued growth trend is impressive and testament to the increased maturity and sophistication of the ILS investor-base and ILS funds/managers alike, in order for the space to continue this trend and avoid any potential plateau, it needs to continue to create efficient and innovative structures that enable deployment outside of its current scope, stressed Anger.

“When we first designed these products 20 years ago, we had many folks that were designing them, but designing them from the point of the investor at that time.

“We’ve been slowly, through incrementalism, expanding what that framework looks like and reshaping it, but there needs to be a constant questioning of ‘Is that the right base structure?’ and ‘What are the eligible risks for alternative capital.’

“It’s a question for the underlying funding sources; are they comfortable, maybe with the expansion of models to help understand fire and explosion and first-party property liability, of adding that into their toolkit so that they understand that there is a quantification of risk that we can expand out of just named natural perils,” explained Anger.

Alternative reinsurance capital and its features, such as catastrophe bonds, cat bond lites, and collateralised reinsurance agreements, to name just a few, are prominent in areas such as U.S. coastal risks. This is supported by the fact that U.S. named storm and hurricane is typically one of three most common peril regions covered by catastrophe bond issuance, as recorded by the Artemis Deal Directory.

But as highlighted by Anger, regions of the globe that are extremely vulnerable to natural disasters in both developing and mature markets remain dangerously underinsured, and ILS has the ability to have a meaningful influence here, the challenge is creating the right solutions that benefit all parties involved.

For developing economies and markets such as parts of Asia, Latin America and Africa, for example, the challenge relates to the education and awareness of residents about the potential risks and solutions available to protect against these risks. But also the challenge is exacerbated by a lack of historical data and advanced modelling that’s seen in peril regions such as U.S. hurricane, for example.

In developed regions and markets that are well understood but that have inherent uncertainties surrounding potential damages and occurrence, like U.S. earthquake, underinsurance exists owing to event proneness being so high in certain earthquake-prone areas that premiums are simply too high for homeowners.

And while pools and funds exist in some states of the U.S. and similarly throughout the world to provide protection against extreme events, ultimately reducing premiums for citizens, notably the California Earthquake Authority (CEA) and the African Risk Capacity (ARC), ILS capital could have a greater influence on other underserved peril regions.

Expanding the reach of ILS into new perils and corners of the globe will likely alleviate some of the pressure from the property cat space, with capital being redeployed into less competitive, new business lines. But in order for this to happen the risks need to be understood by both the market and investors, so that the right tools can be developed that protect in the most efficient and effective way as possible.

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