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September 2012 Bermuda Re/insurance


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David added that improvements in capacity modelling, which enable the industry to better understand such issues as the description of risk and the type of attachment, will enable the market to function more effectively. Finally, he indicated that the development of risk modelling firm, Perils in Europe, which applies a neutral, consistent methodology to describe exposure as well as industry loss has aided the market in its knowledge, understanding and application of risk transfer.


Wightman added that liquidity would be key to future market


development, and said that the market is at “a tipping point—in terms of product offering, awareness and efficiencies—at which the sector can attract a broader spectrum of investors into the space”. He highlighted the industry-loss warranties sector of the ILS space as one to watch in terms of attracting broader investor support, arguing that they are “relatively straightforward, are in a liquid market and tend to provide good access to pricing and returns in the latter half of the year”.


Considered interest


are transferring from their books”, with ILS representing an increasingly popular complement to traditional reinsurance. This has given risk managers the opportunity to “balance the risks that they transfer across products in order to better manage their risk down”. He highlighted the success of Citizens Property Insurance’s Everglades Re Bermuda cat bond, which enabled the firm to place $750 million of coverage—half its total budget—in the ILS market. He said that for primary insurers such as Citizens, ILS products can offer a counterpoint to the “cost and capacity limitations of reinsurance”, particularly when capacity is constricted post-event.


Further aiding the ongoing success of the market will be its “track record and established history of issuance”, said Kent David, vice president of consulting services at Eqecat. He said that rising volumes had helped generate greater interest and cemented the reputation of the market in the eyes of the wider capital markets. Much of this is linked to the “demonstration of orderly settlements following global disasters, which have helped to increase the faith in, and understanding of, these products and demonstrated that risk analyses are robust and the instruments reliable”, he said.


Rather than a flash in the pan, it seems that interest in the ILS space isn’t going to go away any time soon. In fact, market statistics show a slow, upward climb in issuance. And talking with Paul Schultz, CEO of Aon Benfield Securities, he indicated that he did not believe that there was a ceiling for ILS issuance. Wightman was equally bullish, adding that one leading asset manager recently predicted the market would double in size in the coming years. He said that ILS account for around 14 percent of property cat capacity now and if it rose to around 30 percent—“and there has been no glass ceiling observed yet”—it would represent a sizable chunk of the market. David likewise indicated that interest in ILS products would be sustained, with the “diversification of available risks set to further increase the market’s potential”.


Schultz added that a further push would be derived from “rising interest in transferring risk and volatility into the alternative market as demand from underlying clients for peak capacity continues to increase”. He said that in the case of both ILS and traditional reinsurance, “all these markets participate to meet underlying demand”—and it does not seem about to go away any time soon.


David did however add that there may be a limit to investor capital,


but stated that it was not a function of the market, rather a reflection of the options available in the wider capital markets.


Wightman said that he foresees a market in which both traditional reinsurance and alternative products will work side by side. “There is a synergy between ILS and traditional reinsurance that allows them to complement one another,” he said. Wightman indicated that risk managers will probably look for a mix of risk transfer options in future, with the ceiling for ILS likely to be dictated by market conditions. David added that where there is “competition with


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