Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

To enter emerging markets ILS needs to educate: Simon Young, ARC


In order for the insurance-linked securities (ILS) product to have a meaningful influence on emerging markets Simon Young, of ARC Insurance Company, has stressed the need for greater education of the benefits the risk transfer and asset class can bring to underserved regions across the globe.

The lack of insurance and reinsurance penetration in emerging markets throughout the globe is resulting in a growing protection gap, which has the potential to widen each time disaster strikes in a place that lacks adequate coverage.

In response, the reinsurance and risk transfer landscape, including ILS market players are increasingly looking for ways to innovate in order to provide adequate, and affordable protection to those most in need, while also adding diversification in the forms of new risks and regions to their portfolios, supporting overall growth and increased profitability prospects.

Global insurers and reinsurers already have a presence in some of the world’s emerging risk markets, and while ILS capacity has found its way into Japan, and more recently China through the issuance of catastrophe bonds, the asset class is yet to have a meaningful impact on other emerging Asia-Pacific regions, Latin America, and India, among others.

“I think spending some face time, and somehow getting the industry to have a front, if you like, a kind of marketing team, that’s going to be necessary. I think even if the price gets to be competitive, which I don’t think it is right now because of the deal size mainly, and the fact that the rates are incredibly low.

“But even if the traditional market hardens, I think deal size is one part of it, but also just being out there and saying, ‘there are alternatives,’ I think has got to be a part of it,” said Simon Young, Chief Executive Officer (CEO) of ARC Insurance Company, a financial affiliate of the African Risk Capacity (ARC).

Despite the first catastrophe bond being issued little over 20 years ago, in December of 1996, only in the last few years has the maturity of the ILS space and the sophistication of its investor base really started to influence the wider risk transfer environment and show its true potential.

As the market and the wealth of capital markets investors has continued to expand, so too has the desire and potential of the ILS space to move beyond the competitive U.S. property cat space, and access diversifying risks in new regions, through innovative solutions.

However, as highlighted by Young, unlike the traditional reinsurance companies and primary insurers that have strong relationships and an embedded presence in a number of emerging regions, the benefits of alternative risk transfer solutions is perhaps something citizens and governments of emerging regions aren’t even aware of.

Raphael Rayees, Associate at Aon Securities, and speaker on the same panel as Young at the ILS & Cat Bonds London 2016 event held earlier this year, also underlined a need for improved education and awareness of ILS in emerging markets.

Rayees stressed a need for the “ILS community” to “push and educate major stakeholders” in these emerging regions of the benefits of ILS.

Further supporting Young’s notion that in order for the capacity and structures of the asset class to reach the people in need, it’s not just about price, regulations, and other hurdles, but education and letting people know that alternative, and potentially more efficient, more affordable solutions are out there.

For the traditional players that have dedicated ILS teams or partnerships with specialist ILS funds and managers, informing those in emerging markets of ILS structures will likely be easier owing to established relationships, something mentioned earlier by Young.

But in order for the ILS players to access the risk more directly it’s apparent that educating both the governments, which could be the initial starting point for the capacity to enter the region, and also citizens and local re/insurers of the alternatives available to them is vital if ILS is going to broaden its reach in emerging regions.

The ILS market has spent the last ten years or more educating investors on the benefits of allocating capital to this asset class. Now, with an investor base that can deploy significantly more capacity if the opportunities were available, perhaps it is time for the ILS market to educate the cedants of the future.

Explaining the benefits of collateralised reinsurance protection, the structures used in ILS, the triggers and the options for coverage that are available, would all help to increase ILS penetration globally.

Of course, as Young says, price remains an issue, particularly with major global reinsurance firms using emerging markets to diversify their exposures. But perhaps, as ILS begins to enter these markets, the diversification benefits will also enable ILS capital to become increasingly efficient in these regions and it is just a matter of getting some cedants on-board and achieving a critical mass.

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