To further expand and develop the overall insurance-linked securities (ILS) pie the market needs to add greater transactional efficiency, and also access more original risk, according to Tom Johansmeyer, assistant vice president, Reinsurance Services, ISO.
The entire ILS market looks very different today to what it did ten years ago, with growing acceptance from investors and sponsors alike of the asset classes’ structures, willingness and capacity leading to its recent rise.
And in particular, growth has been evident during the last two to three years, as its share of the overall reinsurance market has increased significantly to an estimated $68 billion – $70 billion by the end of 2015.
For some firms, the competitive, low-yield environment has led to a need to consolidate or merge, reduce reinsurance panels and purchasing, centralise their reinsurance purchasing, and has also seen firms cease writing business altogether in the most pressured territories. All in an effort to increase efficiency, lower costs and ultimately remain relevant to the market and clients.
Johansmeyer states that the ILS market, in order to continue its evolution, needs not only to innovate to access more original risk, but also innovate to add greater efficiency to its transactions.
As an example of how the ILS market has added efficiency in recent times Johansmeyer draws on the burgeoning issuance of cat bond lite transactions, which provide lower frictional costs than a 144A catastrophe bond structure, resulting in an easier, quicker and more nimble transaction.
Typically, cat bond lite transactions are a smaller, more streamlined approach to the securitisation of risk than a traditional 144A cat bond, but in recent times the size of these private deals has shifted.
Some of the larger cat bond lite deals seen in recent times are capitalised to the tune of, or beyond $70 million, which is actually larger than some 144A transactions, underlining the value efficiency adds to sponsors and investors in the space.
“It’s where we are now and it’s definitely an improvement that speaks to the evolution of the ILS environment, but the next step has to be to take that from origination to optimise, to trade to optimise,” explains Johansmeyer.
While a cat bond lite transaction adds clear efficiencies, and as recent issuances have shown can have fairly substantial capitalisation, Johansmeyer feels confident the market can go even further, with the establishment of an exchange-traded platform for risks within the ILS space.
This is an area we’ve discussed with Johansmeyer previously on Artemis, and one that ISO has been looking into for more than two years now.
“An exchange traded solution needs to provide an easy, efficient, transparent, and reduced cost opportunity for one party to move risk and another party to assume it,” says Johansmeyer, stressing that Bermuda, owing to the Bermuda Stock Exchange (BSX), sophisticated ILS industry and that “it has the original risk in the market,” is the right place for a platform of this nature to flourish.
“That’s the next step in the ILS evolution. The missing piece has been getting more first bites of those apples, and when it comes to original risk I say we all give in to a little temptation,” said Johansmeyer.
In order for the ILS market to continue its impressive evolution, Tom Johansmeyer feels that alongside increased transactional efficiency, “for all forms of ILS we need more risk to come into the market, that’s original risk.”
“That first bite, you can’t recreate the first bite of the ILS apple, or any other for that matter,” continued Johansmeyer, addressing an audience at the 2015 ILS Bermuda Convergence conference.
Original risk, explains Johansmeyer, is the exposure what first enters the risk transfer sector, so the risk that comes into the market that makes the trade possible in the first place.
“It could be the cedent laying off in a reinsurance transaction, it can be the original insured by a homeowners policy, and it could be one half of a fund-to-fund retro deal,” explains Johansmeyer.
For global insurers, reinsurers and ILS players the need to innovate into new regions and risks is as important as ever in a very challenging operating landscape, however, this is something that can be difficult to achieve absent local market knowledge, underwriting expertise, and adequate modelling capabilities.