Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Slower growth but with more innovation is the future for ILS


After a period of what ILS market participants termed surprisingly rapid growth, the insurance-linked securities (ILS) market is set for slower growth ahead, but with more innovation, leading to a deeper participation by alternative capital in reinsurance.

The ILS market has created a strong base for itself, with around 15% of the property catastrophe market using alternative reinsurance capital and collateralized covers now featuring in many of the world’s largest reinsurance programs. The way forwards was a topic of discussion at the ILS Insight event, held by Guernsey Finance last week in Zurich.

Niklaus Hilti, who leads ILS investment management at Credit Suisse, said he was a little surprised at the pace of the ILS markets growth in the last one to two-year, particularly the catastrophe bond market growth rate was impressive. Investor appetite has been ‘tremendous’ with of course the global financial markets and low-interest rate environment playing a part in that.

Recently some signs of a slow down in ILS market growth have become apparent, perhaps seen in pricing at first, according to Hilti. Part of this could be attributed to a lack of overall reinsurance growth, as the cake is only so large and ILS only has a piece of it.

Hilti said that he believes that in the future the ILS market will see growth, but it will be much slower and driven by innovation, flexibility to do new things and to grow deeper into the reinsurance market. Hilti said that he sees ‘less growth, but still growth’, in the future with the market likely to move into new and interesting areas.

Jonathan Barnes, senior adviser at London-headquartered ILS investment specialist Securis, said that he agrees that where catastrophe risk is concerned the cake is finite at any one point in time meaning the growth rate seen in recent years is unlikely to be maintained.

Barnes said that he sees opportunities for ILS in assisting to narrow the gap between economic and insured losses from catastrophe and to help insurance penetration to grow globally.

These comments tally with other investment managers in the ILS space, who feel that recent growth has been driven by ILS’s ability to operate at a low-cost of capital. Opinions differ on who has been leading the price decline, ILS or traditional reinsurance capital, but in recent weeks it certainly seems that ILS capital has found a level of pricing where it is happy to stay.

A slower rate of growth, driven by innovation, flexibility and new initiatives, rather than by capital inflow and pricing, is where the ILS market participants we’ve discussed this issue with are keen to focus their efforts. The topic of innovation and new initiatives comes up increasingly regularly at the moment, as does driving growth by helping insurance penetration to increase and supporting such initiatives.

This seems a healthy way for the ILS market to grow, something that should be more sustainable, resulting in greater diversity of risks covered, stimulating further reinsurance demand and enabling ILS managers to provide the returns their investors are seeking. Innovation and product development in ILS is also key as that will help ILS managers to create something more unique, perhaps where traditional balance-sheet reinsurance capital cannot be so competitive.

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