they have used the capital markets to make their own balance sheet more efficient.”
If anything, ILWs can help reinsurers to grow their business
relationships, argues Albertini. “When I used to originate new business in capital market form, I always tried to present the capital markets and traditional reinsurance as two products which complement each other. For example, if you are already supply ‘x’ billion dollars’ worth of traditional reinsurance to a company, then to grow that relationship beyond that point might be uncomfortable for both parties. So what else can we do to go above and beyond that? This is where capital markets instruments can come into play.”
So what is the future for ILWs?
“We view alternative markets in general, including both ILWs and cat bonds, as a complementary source of capital,” says Schultz. “Most buyers are going to want to purchase cover which they can claim when they have actual losses, because that is the perfect hedge for the buyer. There are some motivating factors which cause interest in indexed or non-U&L
covers, but the primary source of capital will continue to be bought on an actual loss recovered basis.”
Habay agrees, seeing a further chance for ILWs to improve and global
trading volume to increase. “Do I think that ILWs are growing? Yes I do, both in the traditional sense
of being based on an industry loss index and a parametric trigger or ones that are more customised,” he says. “ILWs are becoming more sophisticated in terms of tailoring deals to buyers’ exposures and views of risk.”
Others believe these developments can also be driven by external factors. “What I think will be interesting is as modelling steadily improves,
you will find that the basis risk declines and the attraction toward commoditised contracts will increase,” says Robert CB Miller, a consultant of Environova Consulting.
So rather than completely taking over the market, it would appear that
ILWs, along with other alternative methods of risk transfer, will continue to develop and improve, providing more options to those seeking protection, rather than simply replacing traditional reinsurance in its current form.
September 2011 | INTELLIGENT INSURER | 53
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