Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Why pricing transparency is important for ILS investors


The increased maturity of the insurance-linked securities (ILS) sector has been reflected in the transition of its investors, from pure capital providers to sophisticated players with a greater willingness to understand their exposures, underlining the importance of pricing transparency in the sector.

In recent times capital market investors have demonstrated an increased appetite for reinsurance risk, underlined by the continued strong issuance levels seen in the catastrophe bond space, and the recent growth of collateralized reinsurance agreements, sidecar ventures, and cat bond lite transactions, among other structures.

As the investor base and its maturity has grown alongside the development of the asset class, pricing and deal transparency has become ever more vital than before, particularly when compared to the traditional reinsurance space.

In a market that was once predominantly occupied by traditional market players, where underwriters’ “autonomy and experience” held much weight, and capital providers weren’t so concerned with the detailed workings of a transaction and its underlying risks, a lack of transparency was more tolerable, explains catastrophe risk modelling firm Risk Management Solutions (RMS) in a recent article.

Today, however, the world has changed, “as collateralized reinsurance and sidecars financed by highly technical investors become increasingly widespread, especially in retrocession markets, better quality data is more important than ever, and often essential to getting the deal done,” says RMS.

Investors in the ILS space include large institutional investors such as hedge funds, and pension funds, among other large, sophisticated organisations, that typically deploy a small percentage of their investment capital into the space, seeking attractive returns that crucially hold an extremely low correlation with the wider financial markets.

But as noted previously by Artemis, transactional transparency is vital to the asset class expanding further, in terms of its investor base and reach, and it’s unlikely the ILS sector would be where it is today without the transparency seen in the 144A catastrophe bond market.

“Furthermore, the ILS market demands valuation of its on-risk investments, as fund managers face increasing pressure from stakeholders (internal compliance, regulators, and especially investors) to have deals marked independently,” says RMS.

Investors are more likely to initially enter, and return to the ILS space owing to greater transparency on pricing, which can be better achieved with a holistic view of the risks, something that requires consistent, detailed data to eliminate over-exposures and deal uncertainties.

As models continue to be developed and evolve along with an increased understanding of the ILS asset class across the wider insurance and reinsurance landscape, transparency on pricing and broader deal specifics will be vital in sustaining its growth and increasing acceptance further.

Register today for ILS NYC 2023, our next insurance-linked securities (ILS) market conference. Held in New York City, February 10th, 2023.

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