Trading ILS
liquidity in the ILS space as nothing short of phenomenal. If you’re a buy
“Admittedly you’re talking about short-term duration—one to three
years—but liquidity and secondary market trading is quite strong and healthy,” he says.
demonstrated the growing strength of this type of risk transfer. The year was characterised by a number of records including the industry’s largest
are increasingly attracted to ILS as a form of risk transfer. So, as the primary market grows, so too does the secondary market,
increasing trading and the option for an investor to “change his mind”— something which, Davies says, is a valuable asset.
“The great advantage of a tradable investment over an illiquid assumption of risk is that the risk-taking investor is able to change its mind and adjust its position accordingly. An investor may believe that the market is not pricing the risk correctly, for example,” he says.
for it. Maybe there are other investors with a more optimistic view of investor, may have come onto the market.”
Referencing Ron Dembo and Andrew Freeman’s book Seeing Tomorrow freedom associated within ILS transactions.
“If you can easily and quickly trade out of a position you will not feel
(much) regret if it starts falling in value. If, however, you are stuck with a risk, you may well feel a lot of regret. This concept indirectly allows us to assign a monetary value to being able to trade,” he says.
dynamic and their views might change based on pricing, so they want to know that they have the ability to trade in and out of their positions. It gives them more comfort around liquidity around the marketplace.”
collateral. While conventional collateralised reinsurance places the risk taker’s collateral into a trust account—meaning that new collateral must be found in order to take on new risks—once an ILS is traded, the collateral requirement then lies with the new investor.
TREADING NEW GROUND The secondary market is currently small and underdeveloped in contrast to new investors will come, allowing trading in the secondary market to grow.
“There’s only so much supply in the marketplace, so what you see is 32 | INTELLIGENT INSURER | Spring 2015
people trading to move around their overall position,” says Michael Popkin, managing director, co-head of ILS at JLT Capital Markets.
“The imbalance isn’t that there isn’t interest in the secondary market, it’s just that we need more risk brought in.”
and available to absorb more products easily and the investor base is appropriately deep and sophisticated enough.”
such as a more detailed view of appropriate pricing.
discount for the liquid ILS versus the illiquid standard reinsurance contract. in issues that can be traded and where there is a market price. Consequently, there is more demand for such securities and the price is driven down.”
Popkin says that the pricing around secondary levels provides some guidance around where the price per risk is, which is visible to reinsurers and ILS managers, which is helpful and informative.
“If you’re a traditional market user and you’re coming to market once a
year for your programme placement, and you’re able to observe intra-year where prices are moving, it’s going to give you some idea around what is the multiple required for a particular expected loss, given the mixture of perils.
“It’s providing market information about what the current yield
requirement is for a given level of risk on a more frequent basis, so it is informative,” he says.
have visibility on the capital markets’ view of risk. This may come from viewing things externally as an issuer of bonds. It may come from the reinsurance platform and running a portfolio of bonds. It’s helpful in
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