This interview originally appeared in the recent Willis Capital Markets & Advisory (WCMA) Insurance-Linked Securities (ILS) Market Update, published last week. Willis have kindly allowed us to republish the interview which we felt you, our readers, would find interesting.
The interview is with James Kent, President of Willis Re North America and provides a reinsurance brokers perspective on the insurance-linked securities and catastrophe bond market. The republished interview begins below.
James was appointed as President of Willis Re North America in 2010, where his responsibilities include driving the growth of Willis’ Property, Casualty and Specialty operations throughout North America.
Prior to his appointment as President of Willis Re North America, James ran the reinsurance operations for Willis Re Bermuda where he was responsible for developing new reinsurance business from Bermuda-domiciled companies and for managing inward business into the Bermuda reinsurance market. James was instrumental in establishing Willis Re’s unique Bermuda platform and ensuring that the Bermuda operation became fully aligned with Willis’ worldwide network of offices, thus allowing global clients to receive local representation when dealing with the Bermuda reinsurance market. James joined Willis in 2004.
How do you think catastrophe reinsurance brokers’ view of the cat bond market has changed in the last 5 years?
The ILS market is now considered an established, vibrant and committed sector of the catastrophe reinsurance market. Many insurance companies are sophisticated buyers of catastrophe protection and want to investigate the various coverages available to them to transfer risk.
There is clear convergence among the different sectors of the catastrophe reinsurance market. Many traditional reinsurance companies are reviewing and in some cases investing in risk in catastrophe bond form, while also evaluating whether a catastrophe bond makes sense for them as part of their outwards catastrophe protection programs. We have a product neutral approach at Willis and want to present all options to our clients without any bias as to which forms of protection should be used to help them maximize their return on capital.
The large brokers have all invested substantially in providing capital markets capabilities in response to demand from client buyers to review these alternatives. It has become a standard part of the dialogue when reviewing the larger catastrophe reinsurance programs.
While based in Bermuda in 2002 through 2010 you witnessed explosive growth in collateralized reinsurance limits – do you think the future for the insurance risk asset class lies in private deals with investors or securities such as cat bonds, or both?
Definitely both; one of the most stimulating periods of my career was being in Bermuda in the wake of major market events in 2001 and 2005, and seeing how established reinsurers, together with new entrants and non-traditional investor markets, created much needed capacity. It represented all that is best about the Bermuda reinsurance market; innovation and the ability to move the reinsurance market forward after a major loss event.
Do reinsurance / retro buyers value collateralization, multi-year covers and new alternative sources of capacity?
The multi-year nature of the product and the collateralized protection are clearly viewed as a plus by buyers for the certainty this product can bring in terms of very strong security and coverage across 2 or 3 years, although some buyers understandably will not utilize collateralized markets who seek to apply commutation language. We will often recommend to clients that they consider hedging potential reinsurance price volatility by placing some proportion of the program limit on a multi-year basis, particularly in market conditions where reinsurers are offering competitive pricing due to benign loss activity, and this capacity can often be offered by all sectors of the market.
How do you think buyers and brokers view cat bond pricing generally?
Generally the product is perceived as more expensive when comparing the risk premium plus transaction expenses of a cat bond relative to the gross rates on line paid for indemnity triggered reinsurance, although we are seeing evidence that cat bond pricing can be more competitive than retrocessional pricing at the top end of programs following price increases in the retrocessional market in Q1. The view of overall costs will depend on the value that buyers place on features like the collateral and multi-year coverage, and whether they are prepared to buy protection on a non-indemnity basis.
What would reinsurance buyers and brokers like to see from the cat bond product that is different from now? How would you like to see the market develop over the next 5 years?
Basis risk remains an issue for the product where non-indemnity triggers are used. This can create uncertainty for buyers relative to the clarity of traditional indemnity reinsurance protection.
I would like to see the cat bond market learn some lessons from the ILW and retro markets and offer some capacity at higher expected loss levels and smaller limit sizes. There is lots of buyer demand for ILWs in the $5 – $25 million capacity range. I appreciate that transaction expenses are an impediment to this happening at present, but perhaps structures can develop to bridge this gap. This would also open up the regional market space where many single state companies do not need to buy significant levels of cat capacity.
I also think it would add real value to the market if there was more indemnity and / or aggregate capacity available in cat bond form, as there is demand from buyers of both reinsurance and retrocessional protection for this type of capacity.
In terms of developing the covered perils, I think that more could be done around tornado / hail risk in the U.S., particularly if sold on an aggregate basis, and global flood risks. Terrorism protection would be good as well, although I recognize there are modelling issues that make it difficult to put that into cat bond form.
Our thanks go to James Kent and Willis Group for kindly allowing us to republish this interview.
Willis Capital Markets & Advisory (WCMA) is a marketing name used by Willis Securities, Inc. (WSI), a licensed broker dealer registered with the U.S. Securities and Exchange Commission and member of FINRA and SIPC, and Willis Structured Financial Solutions Limited (WSFSL), an investment business authorized and regulated by the UK Financial Services Authority. Both WSI and WSFSL are Willis Group (Willis) companies. Willis is a global insurance broker and provides insurance brokerage and risk management services to clients around the world. Securities products are offered in the U.S. through WSI and in the U.K. through WSFSL. Nothing in this communication constitutes any legal or financial advice or an offer or solicitation to sell or purchase any securities.