Swiss Re Insurance-Linked Fund Management

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ILS “very much engrained” in global risk transfer: Priebe, Guy Carpenter


The expanding base of insurance-linked securities (ILS) capacity is likely to remain an integral part of re/insurers’ capital structure, and even after the devastating impacts of 2017 catastrophe events, the alternative space continues to strengthen its position in the overall risk transfer market.

Recent analysis by reinsurance broker Guy Carpenter (GC) shows that alternative, or third-party reinsurance capital grew by 9% in 2017 to $82 billion, a new high that was achieved despite the major losses experienced in the second-half of the year.

In the aftermath of hurricanes Harvey, Irma, and Maria, the powerful Mexico earthquakes and severe wildfires in California, industry commentary turned to the ILS space, and how both investors and sponsors would react to the sector’s first real test.

Industry commentary noted concerns over the potential for trapped collateral and the fact large losses might send investors running, but the sophistication, attractiveness and maturity of the ILS space saw the ILS fund market and other collateralized reinsurance vehicles replenish their capacity in time for the January renewals.

“Though the recent events may provide the first real test of alternative capital, investors have indicated they are prepared to recapitalize or increase their current positions, and in some cases they already have,” says David Priebe, Vice Chairman of Guy Carpenter, in a recent article on brinknews.

The collateralised reinsurance market is now the largest sub-sector of the ILS space, followed by the catastrophe bond space, which, as shown by the Artemis Deal Directory and Artemis Q4 2017 ILS & cat bond market report, broke previous issuance records in 2017.

Priebe explains how earthquakes and hurricanes provide an opportunity “to define the viability and effectiveness of catastrophe bonds, creating either a day of reckoning or a day of glory for the ILS market.”

While the remit of the catastrophe bond market is expanding, it remains very focused on the U.S. property catastrophe space, typically sitting at the top of companies’ reinsurance towers to protect against infrequent but severe events, similar to those seen in 2017.

“Thus far, we have seen these catastrophe bonds demonstrate their effectiveness and serve their intended purpose,” says Priebe.

Adding; “Assuming the ILS market responds to these catastrophes as defined, this capacity will likely remain an integral part of insurers’ capital structure, even when interest rates rise. Most ILS issuances define interest rates as a risk spread on top of return on U.S. Treasuries or to LIBOR, so the asset class will remain attractive as interest rates rise.

“ILS is now very much ingrained in the overall risk community, creating a pool of diverse capacity collectively serving and supporting the (re)insurance industry.”

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