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Important for reinsurers to use ILS to lower cost of cover: Gale, XL Caitlin


The Chief Executive Officer (CEO) of XL Catlin, London, Jonathan Gale, has stressed the requirement of insurers and reinsurers to offer insurance-linked securities (ILS) solutions in order to reduce the overall cost of reinsurance protection.

It’s been reported that across the reinsurance landscape the majority of players now utilise alternative reinsurance capital in some form or another, a trend that can help to reduce costs and increase efficiency through the value chain, if understood and used prudently.

As part of the panel for the Standard & Poor’s (S&P) roundtable at the 2016 Monte Carlo Reinsurance Rendezvous, XL Catlin’s Gale was questioned on the necessity of a reinsurer to offer ILS solutions to its clients as part of its capital structure.

“I think you need levers to pull, and if someone has the desire for risk with lower hurdle rates, than say we have, and we have access to that business, we owe it to our clients and then to their clients to lower the gross cost of reinsurance.

“And if we can do that efficiently through those types of vehicles, that’s great,” said Gale.

In certain cases, dependent on the client’s needs and cost expectations, it might well make more sense to utilise traditional sources of reinsurance capacity and structures, instead of a mix of traditional and ILS or just an ILS solution. But as the willingness and sophistication of the ILS community has increased, the ability of the marketplace to improve efficiency, and add diversifying, low correlation benefits to a portfolio has become more apparent.

By adopting strategies and business models that enable the facilitation of ILS solutions, reinsurers can position themselves well to take advantage of the abundance of efficient, diversifying capital markets capacity.

With rates in the global reinsurance industry under pressure and expected to continue falling throughout 2016 and into 2017, having access to a broader range of capital from a diversified scope of capacity providers can enable reinsurers to offer more value to clients and remain competitive in the current market environment.

Gale underlined that at XL Catlin the facilitation and utilisation of ILS is taken very seriously, and is considered an important part of the company’s forward looking plans, whether this be in relation to catastrophe risk or other types of risk.

However, “it’s got to be combined with the products we are selling our clients, we want to be sustainable through a cycle, we want to have the ability to offer coverage the day after a loss,” explained Gale.

“What we don’t want to do is have some transaction that is obviously geared against whoever is taking it on, to work against them, and therefore they put away and we can’t continue what we offer,” continued Gale.

It’s a valid point, and Gale added that in the case of the above it could result in not being able to offer a client the same thing year-in-year-out, which could undermine a relationship with an important client that has taken time to establish. So it’s important that offering an ILS solution as part of a capital structure is done for the right reasons, and not just for the sake of accessing the capital markets.

When properly understood and utilised for the right risks and in the correct manner, ILS solutions can help to reduce the overall gross cost of reinsurance, which in turn should benefit the cedent and then ultimately the end consumer.

The size and scope of the ILS market continues to grow all the time, and with all in the reinsurance industry under pressure to remain relevant and increase efficiency and value across the board, the capital markets could have a very important role to play for re/insurers in their fight to navigate the challenging market conditions.

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