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Original Risk: A Society for Change Agents

ILS suited for transfer of elemental cat risks & weather risks: JLTCM


Businesses across the globe should look to the capital markets in order to transfer basic catastrophe risks and weather risks off their balance sheets, for the benefit of both the cedent and the insurance-linked securities (ILS) space, according to ILS experts at JLT Capital Markets (JLTCM).

The ILS space continues to expand and deepen its relationship with insurance and reinsurance markets around the world, continuously looking to build on its geographical reach and product set for the benefit of cedents and the base of mature, and increasingly sophisticated capital markets investors.

The property catastrophe space remains highly competitive and as a result rates under significant pressure, prompting a need for alternative reinsurance capital to access new risks and new geographies if it’s going to achieve the kind of growth that’s been witnessed in recent times.

JLTCM, the capital markets division of insurance and reinsurance brokerage JLT, has highlighted just this, and discussed some potential areas that the capital markets could play an important role in the transfer of risk.

“We are working with specialty markets to see what other opportunities there are for transferring elemental cat risks and weather risks. Also, business interruption and contingent business interruption are well suited to the capital markets,” said Michael Popkin, Co-Head of ILS at JLTCM, in a recent article produced by the firm.

“Businesses retain weather risk – for example, too much rain or snow or it being too hot or cold – that affects both revenues and costs. They should consider shifting these risks to ILS investors,” continued Popkin.

We’ve discussed the potential for ILS features and capacity to assume weather risks previously at Artemis, a notion that was brought into focus after the completion of the Market Re Ltd. (Series 2016-5) catastrophe bond, the second transaction in the market’s history that covered weather risks (the first being Kelvin Ltd. in 1999, as recorded by the Artemis Deal Directory).

The innovative, $30.75 million deal was structured and successfully closed by JLTCM, and sponsored by Allianz Risk Transfer, and following its completion the reinsurance broker noted that the deal was well received by the capital markets, suggesting further innovation around weather bonds in the future.

And now, the firm’s capital markets team have noted the potential or ILS to play an increasing and influential role in cat risks and weather risks for businesses, something that deals such as Market Re Ltd. (Series 2016-5) should support increased acceptance of, and understanding that such solutions can be achieved through the ILS space.

Much like catastrophe risks, weather risks provide investors with low correlation to broader financial market headwinds and a positive, stable expected return, something that was explained by Nephila Capital’s Barney Schauble in a discussion with Artemis earlier this year.

The willingness of the investor base to assume a diversified, in terms of peril and location, set of exposures is apparent in the ILS space, and combined with continued innovation surrounding the structuring and issuance of weather risks and elemental cat risks for businesses, there’s opportunity for capital markets growth in these areas, highlights JLTCM.

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