Demand for risk capacity “accelerating in all dimensions”: Kumar, GC Securities

Client demand for risk capacity is “accelerating in all dimensions” according to Shiv Kumar, President of GC Securities, the capital markets and ILS specialist unit of reinsurance broker Guy Carpenter.

Speaking to Artemis around the 2024 Monte Carlo Rendez-Vous event, Kumar explained that the insurance-linked securities (ILS) investor-base has an opportunity to lean forward into these trends, to derive new opportunities.

“The ILS space has been very successful in addressing the need for property catastrophe risk capacity in the market over the past two decades. With increasing economic growth, inflation in property values and climate change, the demand from our clients for risk capacity is accelerating in all dimensions,” Kumar explained.

But added that, “We see some hesitation from investors in providing solutions for aggregate covers which include secondary perils and there is limited investor appetite for lower layers in the reinsurance tower,” while in addition “The market also struggles with E&S portfolios and program business.”

He also noted that, “The penetration of the ILS market beyond property catastrophe lines is being attempted but has been challenging.”

But urges the market to seize opportunities that are evident in clients needs, saying, “As more capital flows into the ILS space and the traditional reinsurance market remains robust, investors will have to lean forward in some of these areas to construct interesting and diversified portfolios. At GC Securities, we are committed to educating the market and broadening its footprint.”

Moving on to discuss challenges that ILS markets and investors might face, Kumar highlighted model-reliance and how certain views of risk can differ.

“The ILS market is very technical in that it is underpinned by third-party expert modelling,” he told us. “This is a desirable feature as it provides consistency and rigor to the market.

“However, the models are updated as new information becomes available but the updates are not implemented at the same time in the ILS and traditional market.

“This creates a potential situation where a tranche may look riskier under a new model version in the ILS space compared to what the sponsoring cedent or the traditional reinsurance market may see in a prior model version on their system.”

Kumar went on to caution that, “Investors should be careful to not price themselves out of business at year-end due to risk quantification variation in different model versions.”