As capital market investors increasingly look to access the relatively uncorrelated returns of insurance and reinsurance risk, their appetite is driving market expansion further into primary sources of insurance risk, with insurance now becoming a key area of growth for the ILS market.
“Insurance, in addition to reinsurance, is starting to become a growth area for ILS,” explains Willis Towers Watson Securities, the capital market unit of the insurance and reinsurance broker, in the firms latest ILS market report.
WTW Securities explains that the growing appetite for accessing insurance risk comes as ILS investors and ILS funds are trying to expand their assets under management, and realise that primary sources of risk provide significant potential for growth, especially if investors can stomach some risks beyond pure catastrophe exposures.
WTW says that incumbent insurers and even corporate risk managers are now working out their responses to the increasing entry of ILS capital more directly into primary sources of insurance risk, with them “trying to position to play offense or defense to this trend.”
Of course, this trend of ILS capital targeting direct access to primary insurance risks, isn’t just driven by assets that need to be deployed. This trend began as a way to more directly connect the original source of insurance risk with the capital that ultimately has the appetite to back it.
As such, the shortening of the risk-to-capital value-chain has driven ILS funds and investors to find novel ways to access risk increasingly directly, efforts that have helped some to grow, others to find more diversification, and everyone involved to find better margins.
By bringing ILS capital to the front of the risk-to-capital value-chain, fund managers can back portfolios of primary risk directly, so removing the need for reinsurance brokerage and enabling them to take structural decisions to help to offload the more volatile, frequency and attritional exposure, often with the help of a fronting partner.
Better margins, lower intermediation costs, and fewer touch points between the insurance customer and the capital provider that wants to hold that risk until maturity. A shorter and more efficient marketplace value-chain, hence this is viewed as a positive by many.
WTW says that innovation is helping to drive expansion of ILS, as the structure evolves to enable investors to more directly back risk, expand their portfolios and find new ways to transact and partner more directly with insurers or reinsurers, or as the insurer themselves.
“The near future may also continue to see more ILS penetration in insurance,” WTW explained.
The company notes that for now, expansion into insurance is with the assistance of insurers who either provide the fronting paper for, or share their risks with, an ILS-backed investment vehicle.
But, “Some investors may ultimately source their own paper to transact without insurance partners,” WTW says.
However, this is likely to take time to make meaningful inroads into insurance markets, due to the complexity of setting up the facilities required to manage insurance portfolios, claims and all of the customer interactions they require
“The next year or two will continue to see experimentation and growth, with any dramatic impacts on industry structure such as we have previously seen in the reinsurance space apparently still a few years off,” the brokerage explained.