Enablers helped private ILS become an important part of the market: ILS NYC 2023

The private insurance-linked securities (ILS) sub-sector is an important part of a marketplace that is no longer niche, and while there’s been bumps along the way, innovations enabled the collateralised reinsurance space to grow organically to meet the needs of both buyers and sellers, according to industry experts.

During the second panel session of ILS NYC 2023, (Re)building confidence – in collateralised / private ILS markets, held Friday February 10th, over 380 attendees enjoyed a thought-provoking discussion around the private market.

The panel was moderated by Mark Gibson, Head of Products & Solutions ILS, Schroders Capital, who reminded the audience that the private ILS market is larger than the catastrophe bond space – perhaps anything from one-and-a-half to two times the size.

“The point is that the ILS market is not a niche market any more, it’s an important component of the reinsurance market, and private ILS is an important part of the ILS market,” said Gibson.

“Generally speaking, it has grown organically to meet the varied requirements of both protection buyers and sellers. And perhaps because the bond market can seem quite rigid in its operation and access sometimes, there have been bumps along the way, and they shouldn’t be ignored or forgotten, and lessons should be learned from them,” he added.

Panellist Chin Liu, MD, Director of ILS, Fixed Income Solutions, Responsible Investment Research, Amundi US, provided his views on the role of the private ILS market in the wider reinsurance sector.

“I think, in general, the protection comes with the growth of the asset class,” said Liu. “We mentioned the cat bond product which grew at a very slow pace, where because of the regulation, because of investors interest and appetite, it manages the potential risks and the potential headaches in a more efficient way, versus my observation on the private ILS side.”

Between 2013 and 2017, continued Liu, the private ILS market witnessed significant growth of capital entering the space.

“That’s where we observed the capital moving from previously a more capital protection to an earnings protection layer. But I guess the question is; is that capital appropriate for earnings protection? And also, what kind of return target should we assign to this type of capital? And what kind of volatility should be engaged with this type of capital? They all come together,” said Liu.

The event’s second panel session of the day also featured Kathleen Faries, Chief Executive Officer (CEO) of Artex Capital Solutions, who explored how the ILS market got to where it is today.

“I think everybody would agree it feels like a bit of a tipping point, or a cycle,” said Faries. “In 2012, the capital in the space was at about $44 billion. So how did we get from $44 billion in 2012 to $97 billion at the peak?”

Data from brokers shows that at the peak of $97 billion of alternative reinsurance capital within the broader reinsurance industry, it’s clear that growth has come from the collateralised reinsurance space. But why is that?

According to Faries, “it was all down to enablers”, including innovations like transformers, segregated cell accounts, fronting companies, and the fact brokers and asset managers educated investors around what they were getting.

“So, the way we got to $97 billion is all these enablers. So fronting companies, TMR and Hannover were a huge enabler, because when you get into collateralized reinsurance you have to deal with reinstatement limits. So now, it’s not a very efficient use of your capital, so out of that came the ability to provide leverage on a portfolio of reinsurance,” said Faries.

“I think it’s a really important part of the growth of the market, and I think we have to find a way to enable us to have confidence in that market if we are going to continue to see the market grow,” she added.

Expanding on this point, Eveline Takken-Somers, Senior Director, Lead Portfolio Manager, Insurance Portfolio, PGGM, said that the fact there were no losses during that time period also caused the market to grow.

“It doesn’t matter whether it’s the cat bond market or the private ILS market. But it seemed for a very long period that ILS was kind of the free lunch, because it was diversified, it came with little losses up till then. So yes, the enablers allowed for kind of the plumbing, but ultimately, I think if we had losses in that period of time, it might have looked different,” she said.

We’ll bring you more articles covering highlights from the event over the coming weeks and in time every ILS NYC 2023 session will be available in video and as a podcast episode as well, so do look out for that. Some initial photos of the day are available here.

Thank you to all of our speakers, sponsors and attendees for their support for Artemis ILS NYC 2023. We hope you enjoyed the day and we look forward to seeing you next year!

View some photos from the day here.

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