The fourth in our series of articles featuring leading figures in insurance-linked securities (ILS) and reinsurance on the market as we move into 2016 features Susan Lane, co-CEO of Tokio Solution Management Ltd.
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 2016.
Susan Lane is co-Chief Executive Officer (CEO) at the collateralized reinsurance, insurance-linked securities and reinsurance convergence facilitating arm of Tokio Millennium Re, Tokio Solution Management Ltd.
She gave us her thoughts on what 2016 might hold for the ILS market, how the ILS asset class might develop and where Tokio Solution will focus on bringing value to its partners and clients.
Her response follows in full below:
With rising interest rates and another year of benign catastrophe losses in the rear-view mirror, we expect investor participation in Insurance Linked Securities (ILS) as an asset class will continue to grow in 2016, although likely not at the same pace as previous years. Despite the prevalence of soft market conditions, established investors with a good understanding of the asset class, a long-term investment horizon and with well-diversified portfolios are still able to achieve attractive risk-adjusted returns. Expected growth is more likely to be in terms of scale from established investors increasing their allocations to the asset class. The lower return environment (for Property/Cat) can make it challenging for new entrants to establish a well-balanced portfolio of a certain scale.
With record levels of capital committed to the asset class, the challenge will be to increase the volume and type of risk entering the market to satisfy investor appetite. Increased capacity coupled with falling risk-adjusted returns is driving the demand for diversification in perils, risks and geographies. To date, risks that can be well quantified thanks to a long data-history and are good models have been the most suited for ILS products. However, demand is driving expansion into other risks such as casualty and primary insurance where there is adequate historical loss data to design coverage.
Historically, ILS geographical risks have been limited to the US, Europe, Australia and Japan. More recently, ILS products are beginning to cover risks in other countries, such as Italy, Turkey, Canada and China. There is good potential for continued expansion as these regions are experiencing strong economic growth and also because they are under-served and under-insured by the global reinsurance market. Expansion in these markets is however made more difficult due to lack of reliable data and analytics and, in some instances, regulatory barriers to access risk.
While in some cases there may be regulatory barriers, regulation can also be another potential driver for ILS growth in 2016 with European cedants. European reinsurance buyers have been slower to expand beyond the traditional reinsurance market. On January 1, 2016 Solvency II comes into effect and it may expand EU cedants’ interest and participation in the ILS market. Under the Solvency II framework capital charges calculated by the standard formula or insurers approved internal models may result in a higher capital requirement which will drive the need for greater levels of risk transfer to the reinsurance and ILS market to the extent that ILS products are treated on an equal basis with other forms of risk transfer. Because ILS products offer cost effective and attractive risk mitigation solutions as well as benefits that may help lower insurers overall capital requirements, we anticipate an expanded use of ILS solutions.
The ILS market is also reaching a broader number of smaller cedants by facilitating smaller, customized private placement transactions that allow middle market and corporate clients to access capital market solutions for their property catastrophe programs. Access to capital markets provides risk managers with more sophisticated and cost efficient risk transfer and mitigation opportunities to broaden their reinsurance coverage and provide solutions for their under or un-insured risks. We expect this trend to grow in 2016.
To meet investors’ substantial appetites for ILS products in 2016, the focus will continue to be on innovation, technology and analytics and its transformational impact on the industry. Capturing and analyzing data can provide a competitive advantage by increasing underwriting profitability, refining pricing strategies and assisting in the management of evolving risk; the capture and analysis of data can also help to identify new markets, assist with product development and frame business strategies. Investment in new technology, models and platforms will facilitate market relevance, growth and re-engineer the market response to better match the needs of investors and sponsors.
Any specific initiatives your firm will be working on in 2016 that you would like to mention?
Tokio Millennium Re (TMR) has a long track-record in working with the capital markets. Since 2003, TMR has continuously advanced its third party capital strategy. In September 2015, TMR announced that it was aiming to make its third party capital strategy a core contributor to the organisation’s earning power. To this end, TMR has established a new unit called “Capital Solutions” in Bermuda that is focused on developing new products and leveraging the use of technology to transact business with its third party capital partners, while Tokio Solution remains as the distribution arm of TMR. In 2016, Capital Solutions and Tokio Solution will continue to work with third party capital partners to help TMR manage its portfolio and build diverse, out-performing portfolios.
Our thanks to Susan Lane for her time.
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Artemis’ Q4 2015 Catastrophe Bond & ILS Market Report – Outright market growth continues
We’ve now published our Q4 2015 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 2015, looking at the $1.525 billion of new risk capital issued and the composition of the cat bond & ILS transactions completed during Q4 2015. The report also includes a review of the full year 2015 issuance and commentary from co-editor GC Securities.