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Product innovation key to capital markets success: Industry leaders


Product innovation within the insurance-linked securities (ILS) space is key to market’s development and usually acts as a catalyst for expansion, a trend that will need to continue to enable the capital markets to play a bigger role outside of the catastrophe space, according to industry leaders.

Speaking at the annual Munich Re ILS roundtable at the 2016 meeting of the reinsurance industry in Monte Carlo, industry executives and leaders discussed the capital markets and the ILS space, highlighting its ability to innovate and the need for this to continue and even intensify for the market to continue growing.

Despite the flood of alternative reinsurance capital reporting a 10% increase in volume during the first-half of this year when compared with the same period in 2015, its entry into the global reinsurance market has slowed somewhat. This is in part due to the overly competitive and overcapitalised state of the property cat space, which is where ILS mostly plays owing to ease of entry and heightened understanding of the sector.

Industry observers and executives have, in more recent times, discussed the need for ILS to expand outside of the property cat space if it is going to see the kind of exponential growth that it’s been used to. And panelists at the Munich Re ILS roundtable, who also underlined the importance of product innovation in the alternative space, reiterated the message.

“We have seen some innovation over the last three or four years with respect to product offering, so it was difficult to get for certain clients aggregate coverage, the traditional market had pulled back, and capital markets was ready to run in. It pulled in the traditional capacity so they are now competing on a level field, so it’s kind of this pull situation between the capital sources. We’re looking at multi-year aggregate becoming increasingly more frequent, but product innovation is very important and that is usually a catalyst,” said Cory Anger, Global Head of ILS Origination and Structuring at GC Securities.

Innovations such as multi-year deals and the increased utilisation of aggregate coverage have, and will likely continue to expand the presence of ILS within the property catastrophe space, but the willingness and sophistication of the capital markets suggests that it has an opportunity to innovate into other areas, and really start influencing a broader spectrum of the re/insurance industry.

Pina Albo, member of the Board of Management at reinsurance giant Munich Re, commented on the influence of ILS outside of the catastrophe segment, from a more traditional perspective.

“Where we would like to see the alternative market play perhaps a bigger role is beyond the cat space, for other peak scenarios where we hope to find a way to see this capital come into areas such as cyber risk. These are peak scenarios where we would welcome the capital, and pandemic risk for example, so those types of areas we would like to see more cooperation with the capital markets,” said Albo.

Albo continued to explain that in peak scenarios where the cost-of-capital is so high, which is becoming a bigger concern for reinsurers in the softening landscape and low interest rate environment, “having the alternative capital there could help to lower the cost-of-capital to bring solutions there.”

The need to reinsurers to reduce their cost-of-capital has intensified in recent times, as expenses continue to rise while rates fall further across most business lines. In response, and perhaps owing to the realisation that working with ILS solutions can increase efficiency and diversification, most reinsurers now embrace ILS capacity in some form or another, but it is still largely focused on the highly competitive property cat space.

Michael Stahel, Partner and Portfolio Manager, LGT ILS Partners, echoed the view of Albo, but did stress that with risks like cyber where the potential for correlation with wider financial markets increases, it can be difficult, but not impossible, for ILS to play a role, currently.

“There are certain things, certain risks where I believe the ILS market is just more efficient, and better suited to take that risk on.”

“If it’s a massive event where the likelihood of occurrence is very low, but the monetary implication will be huge, that’s where the ILS market could move in. Be it pandemic, be it cat,” said Stahel.

Juan Beer, Global Head of Group Reinsurance at Zurich Insurance Group, agreed that innovation is vital to the alternatives market, and also noted some potential areas the space could look to have a meaningful influence.

“Product innovation really will be key in the alternative market, and I think the willingness of the alternative market to leave the traditional space, which is by in large cat, I think will be very important. And I think the other opportunity is really to bring in some new techniques, be it indemnity or non-indemnity propositions, around cyber certainly, and supply chain is certainly something where the market as whole has really not been able to provide the right response to the ultimate customer,” said Beer.

“I think agriculture is a huge opportunity for the insurance and reinsurance sector as a whole, and I do believe that the willingness of the alternative space really to tap into these unknown territories, I think will offer opportunities,” continued Beer.

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