Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Structures and capacity of ILS will access new risks & geographies


Speaking to A.M. Best at the recent SIFMA IRLS 2016 conference, industry executives said the future of the insurance-linked securities (ILS) market is likely to see the structures and capacity of the asset class utilised in a range of perils outside of the property catastrophe space.

Alternative reinsurance capital continues to expand its share of the overall reinsurance market, and despite a reported slowdown of entry at January renewals, the growth and evolution of ILS is widely expected to continue.

“The ILS market is still growing, at this point we’ve passed the stage of the teenager era, and now we’re entering into adulthood. Risk appetite has been growing since 1997 and there is no slowing down of how the risk appetite is growing,” said Managing Senior Financial Analyst, A.M. Best’s ILS Group, Asha Attoh-Okine.

For the most part ILS capacity remains focused on the highly competitive and pressured property catastrophe space, accessing reinsurance business lines that are well understood and have lower entry barriers.

The robustness of the sector and the current supply/demand imbalance, exacerbated by the inflow of third-party investor-backed capital, at a time when other types of investors are perhaps seeing more capital outflows, shows that investors are really buying into the diversification benefits of the asset class, explained Judy Klugman, Managing Director at Swiss Re.

But as highlighted by industry analysts, experts and executives in the past, for the sector to really grow and continue its evolution as an asset class it needs to access new risks and new geographies with innovative solutions, something the executives at SIFMA 2016 noted also.

The market is growing at 10% to 15% a year, explains AXIS Re U.S. Executive Vice President, Ben Rubin, “and it’s a segment of the market that we think is going to continue to comprise a larger share of global reinsurance capital.

“But we think that capital is going to start to move away from what has historically been shorter tail lines of catastrophe risk and agriculture, and really move into casualty lines. But it is going to do it in conjunction with reinsurers.”

Towards the close of last year and still as the market moves further into 2016, market commentary has predicted the flow of alternative reinsurance capital to begin influencing casualty lines in a more meaningful way.

And as reinsurers look to find more profitable business outside of the property cat space, casualty is predicted to be the segment that will see a rise in supply from both traditional and alternative capital sources.

John Butler, Managing Partner, Twelve Capital, told A.M. Best that he sees innovation in the ILS space in terms of the types of vehicles investors are bringing to the market and what these offer.

“But also in terms of the way that we’re accessing risk and how proximate we’re becoming now towards primary insurance risk, whereas in the past we’ve been as a market more of a retrocessional or reinsurance level writer. And I think that’s really the fundamental change that’s moving through the market now,” said Butler.

In recent times ILS market investors and sponsors have shown discipline and increased sophistication regarding their understanding of the risks, while maintaining an appetite for reinsurance business lines where access is possible, but also showing an increased appetite to access primary lines, like casualty, and beyond.

Bill Dubinsky, Managing Director, Willis Capital Markets & Advisory, expanded on this point, highlighting a desire for ILS to access new risks and regions.

“As far as new risks, we have a lot of interest in some of the risks that the insurers and reinsurers are starting to see, things like cyber.

“And an increased interest, although there has been flood in the past, there’s a lot of interest in trying to really expand the capacity for flood and make it more available and affordable. Not just here in the U.S. but really around the world.”

Even in the most developed insurance markets across the world, including the U.S. and parts of Europe, flood protection is expensive, unavailable, or severely underinsured, highlighting the opportunity for the ILS sector to capitalise on the flood protection gap and bring innovative, affordable, and efficient solutions to support the re/insuring of global flood risks.

Cory Anger, Global Head of ILS Structuring at GC Securities, a proficient sponsor of catastrophe bonds, highlighted the firm’s work with Amtrak during 2015 and corporate bonds, an area of the market that she feels are a good opportunity for the ILS sector, “and hopefully sovereigns, and new geographies and new perils I think is going to be key.”

In terms of new perils and structures, Tom Johansmeyer, AVP, Reinsurance Services, ISO/Verisk, told A.M. Best that he’s exploring the use of parametric triggers for global terror risks, while also looking at improving structures in offshore marine and energy, something he thinks is a “great start to bringing more original risk into the market, and to adding transactional discipline and efficiency.”

Interestingly, Keith Kennerly, Vice President, Structured Health & Financial Solutions at global reinsurer Hannover Re, questioned why the same technology and structures used to cover unpredictable natural catastrophe events in the ILS space, couldn’t be replicated and redeployed to help mitigate some of the unpredictable spend in the health sector following increased morbidity exposure.

So the opportunities appear plentiful, and importantly, the ILS market players have the desire, willingness, and scope to expand ILS’ reach and influence beyond the property catastrophe reinsurance market, and into new risks and regions, something that could also alleviate some of the pricing pressures currently occupying the space.

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