Expanding the potential of ILS

Following a year of tremendous change and convergence in the reinsurance market, we estimate that ‘alternative’ ILS capacity now makes up around 15% of the overall property catastrophe reinsurance (‘property cat’) market. Our paper examines some of the market trends that have surfaced over the past 12 months and looks at opportunities to release further the potential through convergence strategies.

Since the financial crisis, a combination of attractive spreads and diversification benefits have created a voracious appetite in the capital markets for ILS. It is also clear that some of the barriers we identified last year on the supply side are softening and that transparency and innovation have led to greater liquidity in the marketplace.

Structural changes are enabling ILS to be unlocked as a mainstream component of the risk transfer value proposition and the resulting level of interest from investors into the segment is unparalleled.

For the property cat market as a whole, however, there are more participants swooping in on a familiar and static prey and this is putting pressure on the system. This pressure is manifesting itself in both softening prices and what risks are being financed or transferred.

To gain share, without sacrificing the fundamentals of appropriate risk selection and pricing adequacy, participants need to innovate and change. Reinsurance companies are actively driving alternative strategies and asset managers are providing transformative reinsurance services. The challenge is to increase the overall market size.

Geographical diversification, product innovation, customer-centric approaches to risk transfer, simplification and transparency, data and analytical advances will all open up new opportunities and demand. As the search for premium and diversification continues, mass urbanisation and developing wealth and infrastructure in Asia, Africa, South America and the Middle East open up important opportunities, increasing the demand for risk financing and the data that supports this.

The structural conditions of the property cat marketplace are no longer a given. Those participants that can differentiate themselves will fare better than those that continue with the status quo. – even those where traditional and alternative strategies sit side by side if the latter is a replicate of the former. Further consolidation in the marketplace for both reinsurers and asset managers is inevitable.

Market discipline in this period of dislocation is critical. Those that ultimately stand to thrive – the innovators – will embrace this transformative change and create and access new demand at a premium.