The huge volume of outstanding pension liabilities coupled with an increasing weight of available alternative capital searching for smart business, suggests significant growth in the life insurance-linked securities (ILS) space in the coming years, according to Thomas Olunloyo, Chief Executive Officer (CEO) of L&G Re.
Although predominantly focused on non-life, shorter tail and shorter duration exposures, for the ILS asset class, there’s potential for some pretty sizeable growth in the life space.
In light of the opportunity and against a backdrop of impressive growth in the pension risk transfer market and a rise in longevity reinsurance use, Artemis spoke with the CEO of L&G Re, the global reinsurance hub of the Legal & General Group (L&G).
“Life is long-term, we are talking 20-50-year transactions. So, a fundamentally different investment skillset or capital expertise is required. But, I see a lot of changes happening there and I actually see a significant growth in life ILS in the coming years,” said Olunloyo.
The driver of this growth, he explained, will be the “sheer volume of sophisticated capital that is available” to be deployed, combined with the volume of risk that is out there to be written and the fact that primary insurers and traditional reinsurers lack the capacity to do it alone.
As an example, Olunloyo told Artemis that when considering just the pension risk transfer space, there’s over a trillion of outstanding liabilities in the UK, with around the same in volume in Canada and even more in the U.S.
“Frankly, that cannot come from traditional insurers and reinsurers alone, we have to bring in alternative providers of capital. And, certainly, those looking for stable long-term returns, life business offers that.
“So, it’s a combination of the push and pull. It’s the pull of having all these liabilities and the push of having this increasing weight of capital available in the alternative space that is looking to be deployed with smart business,” said Olunloyo.
L&G Re is a heavy user of longevity reinsurance, which is one of the existing ways the pension risk transfer industry accesses third-party capital. Although the life reinsurer hasn’t yet looked to access third-party capital through its own sidecar, or investment type vehicle for its transactions, this could change in the future.
“To date, the ILS markets haven’t really offered the right kind of solutions for what we do, but I expect that to change as that capital grows in size and grows in sophistication, and becomes more attuned to the needs of long-term business,” explained Olunloyo.
Last year, L&G entered Canada in a £114 million (CAD 200 million) transaction and Olunloyo told Artemis that it’s a very exciting, rapidly expanding market for the company.
As L&G Re further expands internationally and grows its own pension risk transfer business as well as the overall market size, there could be an increasing opportunity for the ILS community to provide capacity that the traditional market simply cannot offer alone.