Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Single, credible rater of risk could create more efficient ILS market


Former Head of Capital Markets at insurance group AIG, Samir Shah, feels the insurance-linked securities (ILS) market’s efficiency would benefit from a single, credible rater of the risk.

Continued and mounting pressures throughout the global risk transfer landscape have seen insurers, reinsurers, and ILS market participants strive for improved efficiency across all areas of their business in recent times, as profitability continues to decline.

With this in mind, Samir Shah, formerly of AIG, in a discussion at the 2015 Artemis ILS Bermuda Executive Roundtable, highlighted that greater efficiency could be achieved in the ILS market if there were a single rater (underwriter) of the risk.

An inefficiency of the current value chain, notes Shah, is that an insurer, reinsurer, and ILS fund manager may all get paid to underwrite the same risk for a given transaction, something that could be perceived as an unnecessary, extra cost.

“But it would be more efficient to have one credible rater of the risk, as it’s done in other markets, or maybe it’s a handful of raters of the risk. Everybody prices fixed income in their own way, but they rely on a handful of raters of that risk,” explained Shah.

It’s an interesting point, and while Shah stressed that each counterpart through the value chain has a right, and need to re-price any risk based on their context to the market, and that “risk premium fluctuates with supply and demand in the market and across different markets,” it would be more efficient if the risk were rated by a single, viable and credible entity at the time it enters the market.

Debating Shah’s point, John Seo, Co-founder and a Managing Principal at Fermat Capital Management, LLC. and fellow Artemis ILS Bermuda Roundtable participant said; “It all goes back to that it’s not a science, it’s an art, and the art is that the risk needs to be properly rated given the context and assumption about who is consuming that risk number.

How investors consume that so-called objective risk number is different than how the insurance and reinsurance industry does it.”

Clearly, reducing the amount of times a risk is underwritten through the insurance value chain is going to reduce frictional costs, and therefore improve efficiency. But as Seo argues, when an ILS fund manager transfers a risk that has been rated and priced in the context of an underwriter’s market, “it doesn’t always work.”

“So we have to re-rate it. We have to re-rate it for our context and our assumptions. It’s like everybody else does in insurance and reinsurance markets,” continued Seo.

Having a single rater of the risk, whether that be the insurance company, a broker, a risk modeller, or an independent entity all together, might also increase transparency within the market, while providing a base for the rest of the market to go away and price, or rate the risk from this context.

However, no risk is the same says John Williams, Founder and President, Armour Group Holdings Limited and Artemis ILS Bermuda Roundtable participant.

Adding; “It’s not a homogeneous market from that sense, when you get down to the unique original risks of each insured. So the nuances of each risk and how an insured approaches and manages that risk are vitally important to the knowledge of those risks and their original rating level.”

With technology and analytics improving all the time, and with the expectancy that the trends will significantly impact the re/insurance landscape in the coming years, the insurance value chain is predicted to undergo further, substantial change.

As evidenced by industry executives and experts’ discussions at the Artemis ILS Bermuda Roundtable, the needs, desires, and willingness to re-rate a risk depends on your position in the value chain and your context to the market at any given time.

That being said, the reduction or elimination of any cost along the insurance value chain without compromising opportunities and business operations, would likely improve efficiency in an ILS market undergoing continued and impressive growth.


Artemis ILS Bermuda Executive Roundtable 2015Artemis ILS Bermuda Executive Roundtable 2015

Download a copy of our report from the first Artemis ILS Bermuda Executive Roundtable, in which our participants discuss burning issues affecting the sector, with an eye on innovation and what the future might hold for ILS in Bermuda, and beyond.

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