Solvency II could result in a stronger, deeper insurance linked securities (ILS) market

Guy Carpenter have published their third in a series of publications looking at Solvency II and how re/insurers operating in Europe can prepare for the new regulatory regime, what issues may arise and any risks for cedents. The first report from the series can be found here, the second here.

After Guy Carpenter published their first report in the series, we wrote that Solvency II could be interesting for the insurance-linked securities and catastrophe bond market, particularly with respect to the way that insurance-linked securities could be recognised under Solvency II as a mechanism which reduces risk and could provide capital relief.

Now the third report in the series also contains some positive comments on the future for insurance-linked securities under a Solvency II regime. Guy Carpenter suggest that a ‘stronger, deeper insurance linked securities (ILS) market may emerge as Solvency II goes into effect’.

They note that in particular cedents may benefit “As an often more flexible and longer-term source of capital than traditional reinsurance, the insurance-linked securities market will absorb some of the net benefit that larger traditional reinsurers expect to realize through Solvency II. This will work to the benefit of cedents as the capital markets compete more directly with traditional reinsurance to limit cost pressures.”

That element of competition between traditional reinsurance and capital markets risk transfer solutions is something that is already beginning to become more evident in some of the conversations we have with cedents, recent price competitiveness has helped. For the ILS market to become really competitive and a true alternative to traditional reinsurance is unlikely but it could begin to compete for certain layers of a reinsurance program and also with retrocessional providers.