The fourth in our series of articles featuring leading figures in insurance-linked securities (ILS) and reinsurance on the market as we move into 2015 features Rick Miller and Michael Popkin, Co-Head’s of Insurance Linked Securities at Jardine Lloyd Thompson Capital Markets.
We asked for participants thoughts and predictions for the ILS market, catastrophe bonds, collateralized reinsurance and reinsurance or catastrophe risks as an asset class as we move into 2015.
Rick Miller and Michael Popkin are Managing Directors and Co-Head’s of Insurance Linked Securities at insurance and reinsurance brokerage capital markets unit Jardine Lloyd Thompson Capital Markets. The pair gave us some thoughts on how ILS will develop in 2015, the prospects for privately placed cat bonds (a specialty for the firm) and where new opportunities may lie for ILS markets and investors.
Their response follows in full below:
We anticipate various related themes to emerge in 2015 in response to the growing size of the ILS markets.
First, we expect to see growth in the private markets, particularly private placement cat bonds. Second, we foresee the emergence of more ILS solutions for Business Interruption (BI), Contingent Business Interruption (CBI), and Community Interruption (CI). As the Assets-Under-Management (AUM) of ILS managers continue to increase and the downward pressure on rates has not abated, the ILS market will be looking to source risks from new cedants, leading to increased opportunities for BI, CBI, and CI. Similarly, the markets will continue to seek ways to improve the efficiencies of executing cat bonds, which bodes well for private placements.
With the macro argument for seeking out uncorrelated assets remaining compelling (e.g. see the recent impact from lower oil prices on the fixed income and equity markets for current evidence about correlation), the AUM for ILS managers will continue to increase.
On the back of AUM growth, ILS managers will expand their staffs, resources, and range of mandates. This will give them greater flexibility to look at other parts of the reinsurance spectrum. Experienced managers will be looking for other cedants that have cat risks embedded within their businesses. Corporates and public entities represent a natural place to source additional risk for the increased AUM.
With historical precedence for parametric cat bonds, we will see structures that allow these newer cedant categories to package risk for ILS managers. Cedants will see value in these structures because of their shortened development periods, which would allow them to source much needed cash sooner and/or without having to undertake a lengthy process to prove loss.
ILS investors will be looking for other advantages to source risk for their mandates. With the increased standardization of documents, even larger cedants who have previously gone down the 144A route will increasingly look to private placement cat bonds to save costs and time, especially given that the potential size for private placements has grown substantially in recent years. Both tradable and syndicated, private placement cat bonds allow cedants and ILS investors to build a closer relationship, allowing them to explore other areas where the cedant might transfer distinctive and attractive risks to those managers.
In essence, the demand from upstream investors for uncorrelated risks looks set to continue.
ILS managers and cedants are seeking out opportunities to transfer risk between them. Private placement cat bonds can be a cost effective way to achieve this risk transfer. For new cedants, such as corporates and public entities, private placement cat bonds can be a more cost-effective and easier process than going down a 144A route (as well as being less resource intensive) for transferring unique risks such as BI, CBI, and CI.
As one example, the ILS community could rapidly react in a tactical manner to provide capacity to clients as a way to hedge CI exposure related to terrorism as a way to mitigate the impact of the US Senate failing to pass the Terrorism Risk Insurance Program Reauthorization Act of 2014 (TRIPRA), the successor bill to TRIA.
While the bill may ultimately pass when Congress resumes their work in January, the ILS community could be in a position to provide bridge cover. The ILS markets, with their efficiently evolving capabilities and growing AUM, are well-positioned to provide more comprehensive solutions to cedants of various stripes.
Our thanks to Rick Miller and Michael Popkin for their time.
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Artemis’ Q4 2014 Catastrophe Bond & ILS Market Report – A busy finish to a record year for ILS
We’ve now published our Q4 2014 catastrophe bond & ILS market report.
This report reviews the catastrophe bond and insurance-linked securities (ILS) market at the end of the fourth-quarter of 2014, looking at the new risk capital issued and the composition of the cat bond & ILS transactions completed during Q4 2014. It also includes a brief review of the full-year 2014’s record issuance.