Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Liquidity, transparency crucial to ILS market success: Philipp Kusche


In order to maintain, or increase the investor and capital base of the insurance-linked securities (ILS) market, the transparency and liquidity of the 144A cat bond space is essential, according to Swiss Re Capital Markets Director of ILS, Philipp Kusche.

The growing acceptance, understanding and ultimately utilisation of ILS capacity has contributed to a rise of hybrid reinsurance models, collateralized reinsurance agreements, sidecar ventures and catastrophe bond issuance in recent years, as a growing investor base seeks to access catastrophe exposed reinsurance business lines.

But without the transparency and liquidity the traditional 144A catastrophe bond market provides investors and sponsors interested in the space, the market wouldn’t be where it is today, according to Swiss Re Capital Market’s Philipp Kusche, speaking at the 2015 ILS Bermuda Convergence conference.

Over the last few years, explains Kusche, the collateralized reinsurance segment has shown impressive growth, and while in some capacity the cat bond space has perhaps reported slower growth, “it is just as important to reiterate that without the cat bond market and the transparency in the 144A market, I think the ILS market would not be where it is today.”

“I think the 144A market in particular, from our perspective is crucial to maintain the growth within the sector, to maintain the dialogue with institutional investors within the sector and the education of new institutional investors,” continued Kusche.

The traditional cat bond market provides transparency on pricing information, details issuance volumes, including what perils are being securitized and in which regions and so forth, explains Kusche, and without this information it would be incredibly difficult to maintain a sufficient dialogue, and make it ever more challenging to “convince new investors to be interested in the space.”

But it’s not just ILS investors that benefit from the more transparent and liquid assets within the space, as the pricing and issuance information available is vital in ensuring sponsors’ comfort levels reach a point so that they can confidently utilise the wealth of ILS capacity, said Kusche.

Furthermore, notes Kusche, the liquidity provided to investors in the space through secondary trading is absolutely crucial to its success, as are the abilities to track investment performance via cat bond indices.

Kusche expands; “To have cat bond indices where an investor can track their performance against the market performance is very important to attract further capital. And without having transparent securities being traded in the market that is obviously very difficult.”

That being said, there are some tried, tested and credible models for investment in less liquid securities, something which perhaps wouldn’t have happened if the transparency and liquidity of the traditional cat bond market hadn’t been such to build investor and sponsor confidence, experience and understanding of the asset class.

However, “having real secondary information out there is certainly a very important data point and is something where investors feel significantly more comfortable with,” said Kusche.

Without the transparency and liquidity offered in the 144A cat bond market the ILS space wouldn’t have achieved the growth it has today, in terms of capital base, investor base, product diversification, and the overall increased acceptance and understanding of the asset class.

“The more this product smells and feels like any other security, any other asset class, like any other kind of fixed-income market, I think the more successful this market will be going forward.

“Certainly I think the liquidity, ultimately at least from our perspective, will certainly help the market grow and also will help it, hopefully, to branch out into other lines of business than the capital is currently focusing on,” concluded Kusche.

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