Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Innovation, expansion, diversification key to ILS growth: Industry leaders


In order for the insurance-linked securities (ILS) market to continue to grow at the pace it’s been accustomed to, it will need to expand and diversify into new peril regions via innovation, according to industry leaders.

The ILS market’s focus on property catastrophe business is likely to continue expanding the sector, but at a pace more in line with the traditional reinsurance and insurance industry.

For the marketplace to continue growing at the pace it’s become accustomed to, diversification, innovation and expansion into new peril regions will be key, according to Paul Schultz, Chief Executive Officer (CEO) of Aon Securities, and Jean-Louis Monnier, Global Head of ILS Structuring at reinsurer Swiss Re.

“I think for the market to grow it’s going to have to expand into different areas besides property catastrophe risk.

“So to see the exponential growth that we’ve experienced working in the alternative space, I think we are going to have to broaden into multi-line, multi-class, and think about ways to innovate around structure, think about ways to bring something to the market that just isn’t accessible,” said Schultz, speaking with A.M. BestTV at the 2016 meeting of the reinsurance industry in Monte Carlo.

The rise of the ILS space in more recent years has been impressive, but increasing pressure on pricing and heightened competition in the property catastrophe space, along with investor discipline, has seen a slowdown in growth of the market in recent quarters, although it is still expanding.

“You look at potentially new perils, new regions, but this is where you hit the hurdle of having to compete with competitive reinsurance prices, for anything which is diversifying compared to U.S. perils,” said Monnier.

The excess capacity in the global reinsurance market, of which alternative reinsurance capital makes up a reported $75.1 billion, nearly 13% of global reinsurer capital according to Aon Securities, has contributed to a supply/demand imbalance that’s resulted in a buyers market where cedants are able take advantage of efficient protection.

As a result, it can be difficult for ILS to compete with the cheaper and abundance of traditional reinsurance capital, as highlighted by Monnier.

“There are a few transactions that we are working on that will securitise new perils, but which unfortunately I cannot comment. But we can expect the market to broaden towards, and here I’m looking longer term, towards areas where there would be accumulation risk,” continued Monnier.

One such area cited by Monnier as a potential growth line for the ILS market is cyber risk, a market that is still in development as data and the understanding of the broad range of related exposures becomes better understood.

The need for diversified capacity in cyber was highlighted by Monnier as a potential driver of ILS growth within the segment, but further innovation and an increased understanding of the risk is needed.

“And interestingly this is the first time where we are seeing the ILS market potentially looking at solutions alongside the reinsurance market, finding products itself,” said Monnier.

Schultz also highlighted this point: “I think some of the challenging perils like cyber, I think are quite interesting to the extent that solutions can be developed in parallel with other markets, I think that’s actually quite helpful just to set a standard to create solutions on behalf of clients.”

But to increase its influence in cyber, and other peril regions outside of the property catastrophe space, diversification and innovation is key, explains Schultz. Without this the market will likely continue to expand but at a far slower pace than it’s been used to in recent months and years.

“So generally speaking, I think the market is going to have to diversify to be able to grow in the manner it has been accustomed to, otherwise we’ll se growth that’s very comparable to the traditional reinsurance market,” said Schultz.

Concluding, “To me the value of the alternative market is to give clients choice and to give clients the opportunity to do something potentially different that isn’t available through the traditional reinsurance product.”

The ILS market has shown its innovative skills and willingness to assume new risks, and this is will need to continue in order for the market to broaden and increase its value within the risk transfer landscape.

As modelling capabilities increase for new risks and emerging markets, it will be interesting to see how the ILS market reacts and adopts new structures to bring something new to investors and the broader re/insurance industry.

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