Tech, models & proximity to risk to drive ILS growth: Grimes, Fitch

Insurance-linked securities (ILS) market growth is expected to be driven by technological developments, new catastrophe risk models and ILS funds ability to get close to the source of the risk.

There is plenty of room for ILS market growth, both in traditional catastrophe exposed regions and lines of business, as well as more emerging regions, but many opportunities are likely to be driven by technology, Chris Grimes, Director of Insurance at Fitch Ratings told us in an interview.

“The capital markets still have room for growth in the U.S. property (re)insurance sector as the region remains by far the most well modelled and widely understood,” Grimes explained.

Adding that, “ILS investors are very sophisticated when it comes to modelling, but this becomes more challenging in developing regions with less robust data.

“ILS growth is expected to continue around the world, but the most significant areas of opportunity remain in areas where data and models are more comprehensive.”

Within the growth expected in the ILS and alternative reinsurance capital sector, Grimes expects that the largest ILS funds and managers will be the recipients of the highest capital inflows.

“Major ILS funds already have a significant influence on the amount of retro capacity that is available in the market.

“We expect that the largest ILS will have an increasingly meaningful role in the management of global catastrophe risks as the alternative market continues to mature,” he explained.

Key to growth will be technology and in particular development of new catastrophe risk models, that help managers to better understand and price insurance or reinsurance risks in developing regions, or new lines of business, Grimes said.

“Investor demand for ILS is influenced by a number of factors, including the accuracy of existing catastrophe models, which pricing relies on,” he explained.

“We expect technological advancements to help drive the future of ILS as modelling continues to grow more sophisticated and (re)insurance carriers utilize innovative technology in their underwriting and claims handling activities in an effort to reduce costs and become more efficient,” he continued.

Finally, Grimes said that at Fitch Ratings the expectation is also that ILS players will increasingly look to get closer to risks, in order to increase efficiency of their capital, secure enhanced access to risks and offer differentiated returns to their investors.

Grimes said, “We see the opportunity for capital market investors to partner with primary insurance carriers as either fronting companies or acting as asset managers, utilizing their underwriting expertise for the benefit of investors and putting them closer to the original risk, further reducing the frictional costs that occur across the value chain.”