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“In the current market it is likely that this will just fuel an arbitrage market rather than provide long-term advantages to buyers.” James Slaughter, Liberty Mutual


“However, and as always with insurance risk, a cautionary approach


is probably appropriate as markets need to learn to deal with the     disputes, reporting time frames, etc) as well as the perennial problem of 


SHAPING THE FUTURE Whatever the wishes of investors and cedants, however, it seems there is still a long way to go. The primary side of the ILS sector remains embryonic compared with some asset classes and the secondary markets trail further behind.


terms of monitoring that because it will give you a directional perspective on a more granular level of where rates are going.”


Davies agrees. “Information gained from the secondary market tells us


what the market thinks each ILS is worth at every point in its existence,” he says. “A new security being traded at a premium—or a discount—tells us 


“The market pricing of similar securities tells us better than any individual underwriter what the correct price for a risk should be if it is to  drives primary underwriting.”


Davies also comments on the potential to introduce a more complex way of trading, which incorporates both ‘short’ and ‘long’ positions.


  complex trading strategies that are driven by price volatility. Currently, investors usually adopt a ‘long only’ strategy in that they buy and then hold their investments.


“A liquid secondary market allows both long and short positions to be taken—and then reversed as desired. Many other markets are driven by  





             expectation of relative price change. The speculator would never go ‘on risk’ in an insurance sense—it would merely be exposed to adverse price movements,” he says.


Slaughter agrees. “There will undoubtedly be development in product around


term, structure and operation. It wouldn’t be a stretch to foresee a derivative market, which would open up a host of hedging, speculative and bespoke  


          


market in a year and, as a result, secondary trading is thin. The price at which a security trades today is not necessarily the price at which you could place a hundred million dollars of risk,” says Davies.


         headline coupon is comparable to a Rate on Line (RoL), so it seems to an insurance company or a risk hedger that the coupon equals Gross Rate on Line (GRoL), and that’s not true.


“Coupon typically equals ‘net’ RoL the investor would receive. That


 Federal Excise—assuming that it’s the US paying a premium to the            overall costs from a risk hedger’s perspective to compare what they would be paying for otherwise traditional coverage.”


Currently, a handful of institutions make up this market, providing bids  


“We are starting to see the embryo of a working secondary market, and while the traditional reinsurance market has been reluctant to adopt electronic trading, it is likely that such a platform, combined with electronic documentation and a recognised clearinghouse system would work very well for secondary ILS trading—and probably for new issues as well.


“The development of similar markets such as those in asset securitisations and syndicated loans will provide a useful route map,” says Davies.


“True secondary markets lead to lower risk transfer prices, deep liquidity,   complex trading and the ability to unwind risk and collateral positions   profoundly and open up many opportunities for perceptive investors.”


Spring 2015 | INTELLIGENT INSURER | 33


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