W
hile the use of insurance-linked securities (ILS) continues to grow steadily as a risk transfer mechanism, some believe the key to its long-term success and continued growth is the creation of a deeper secondary
market for trading this type of risk.
A larger secondary market would likely encourage new investors and bring a level and depth currently unavailable. James Slaughter, senior vice president and director of global reinsurance
strategy at Liberty Mutual, says that broadening the secondary market would not only encourage new types of investors to move into the space as ILS becomes easier to trade, but it would also create a much more liquid space for them to move into and out of freely.
However, he adds, such a situation would be unlikely to provide long- term advantages, such as lower pricing, to buyers.
“From a general market perspective a secondary market should provide manage portfolios and a market for ‘alternative’ capital to deploy its assets to achieve their aims without diluting the small primary market,” he says.
“However in the current market it is likely that this will just fuel an arbitrage market rather than provide long-term advantages to buyers. At easy ways to deploy, then it will seek those opportunities.
sources of appropriate capital is welcome, but from a legal and regulatory perspective the secondary market is unlikely to be a market for buyers that make a capital market for the sellers of reinsurance.”
LEVERAGING THE DIFFERENCE Martin Davies, chief executive at AHJ Capital Markets, explains that it is the existence of the secondary markets available in this asset class which distinguishes the ILS product from more conventional collateralised reinsurance.
By embedding the reinsurance risk into a tradable security, the product can be bought and sold, which in turn allows it to be objectively valued. In turn, this should generate increased liquidity and increase the market’s appeal to investors.
“When an ILS is created, the investors buy a security, the returns of
“Investors have the option of keeping the security and the returns they hope it will deliver or they can sell it during the period they own it. It is this subsequent sale that creates the secondary market.”
But while some bemoan the liquidity available, others argue that it is
already robust. Rick Miller, co-head of ILS at Jardine Lloyd Thompson Capital Markets, says that liquidity and secondary market trading is strong and healthy.
“For a high yield bond market, I would describe the secondary market Spring 2015 | INTELLIGENT INSURER | 31
SHUTTERSTOCK / TAGSTOCK1
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