With the catastrophe market and traditional ILS market somewhat saturated, investors are looking for further diversification in their portfolios. As increased education leads to increased demand for the non-correlated asset class, new solvency regulation in Europe such as Solvency II is predicted to increase insurer appetite for insurance-linked securities and collateralised reinsurance, so as to minimise credit risk charges.
Increased supply and steadily increasing demand will drive strong growth in the collateralised protection products market. This is true for capital markets, which have gone from taking no reinsurance risk to being responsible for holding close to 25% of the market share. The collateralised market is expected to make up more than 30% of the overall catastrophe reinsurance market by 2020.
The report combines the thoughts of pension plan managers, trustees, investment managers and consultants and looks at the risk diversification of ILS investments. The Insurance-Linked Securities for Institutional Investors 2016 report examines the year’s activity across the asset class and considers number of trends affecting the industry and what the future holds.
On the supply side, Michael Stahel, a Partner at LGT ILS Partners Ltd discusses the implications for the new Solvency II framework in Europe, commenting “the most efficient and effective way to buy reinsurance protection within the Solvency II capital requirement is collateralised reinsurance.” The effect of this, LGS ILS Partners predicts, will be that by 2020, “the collateralised market will make up more than 30% of the overall catastrophe reinsurance market… compared to about 18% today.”
One potential implication of the Solvency II framework is an increased level of interest in diversified insurance products, such as life insurance-linked securities. Javier Rivas, Head of Life Products at Credit Suisse Insurance Linked Strategies, commented, “as a consequence of new Solvency II regulations, many insurance companies in Europe are trying to find out how to optimise their risks and capital positions, which can result in a new wave of reinsurance transactions, in which Life ILS can participate.”
Greg Hagood, Co-founder and Managing Partner of Nephila Capital discussed the reasons for the asset class’s continued popularity among investors: “something that is truly not correlated that has a positive expected return will continue to attract capital”, adding that the ‘rare and valuable’ traits of the products have driven capital markets’ share of reinsurance risk from essentially negligible to around 20% globally today.
The report also discusses the prospect of cyber risk as a new product for the industry and the impact of weather forecasting as a tool for determining the underlying value of collateralised insurance products and as a more direct evaluation of weather risk as an ILS asset class.
Dirk Lohman, Head of Insurance-Linked Strategies at Schroders, advises caution, commenting, “There is probably a high degree of potential correlation of a massive cyber event and disruption in financial markets… we don’t believe that this can be clearly argued to be a non-correlating asset”.
Representatives of the Met Office and the Florida Catastrophic Storm Risk Management Center discuss the impact that climate change predictions and increasingly complex weather models have on the underlying value of ILS products. They are expected to become increasingly significant over the longer term with increased interest in products such as life ILS and ‘risks attaching during’ (RAD) contracts, weather forecasting is predicted to play a significant role in the future of the industry.
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