News


ILS: are risks and returns being assessed prudently? I


Maren


n this month’s insurance-linked securities (ILS) blog, Gary Martucci, director, and Josefs, associate


director at rating


agency Standard & Poor’s, discuss the impact of adapting to the influx of alternative capital by providing innovative solutions and lower prices to reinsurance purchasers. They write: The


boundaries between alternative and traditional capital keep


blurring and the reinsurance sector is adapting by providing innovative solutions and lower prices to reinsurance


purchasers. Currently


there is about $24 billion in catastrophe bonds outstanding, and although the progression may not be linear, we believe that during the next few years the cat bond market will continue to grow—by 10 percent to 20 percent per year—as investors accept new risk models assessing perils


across the globe (on at least a parametric basis). We continue to see a drive to reduce costs


and increase speed of execution to connect risks with appropriate counterparties. As everyone tries to jump on the reinsurance


bandwagon, is there a risk of the ILS market overheating and new investors getting burned? Our main concerns in the long term remain the lack of liquidity compared to other asset classes (although it is improving, we are not sure there will be much left immediately before and after a big event), investors’ understanding of the risks they are underwriting using thorough due diligence (such as running own-risk analysis and reviewing legal contracts), and an increasing demand for diversifying perils that might push rates and returns lower than the technical price should be.


WEDNESDAY 16.09.15


Gary Martucci Maren Josefs It is our understanding that several large


ILS fund managers declined to participate in the new diversifying deals with a low coupon of around 2 percent (which market observers argue to be a minimum return target for ILS investors). However, for some funds, the coupon on these issues does not provide


enough return to


compensate for the risk they would take, which includes immense uncertainty in modelling. Nevertheless, these bonds are being placed


successfully. This leads us to conclude that there are investors for whom the diversification benefit is more important than the return they will earn. To read


the complete www.intelligentinsurer.com n


blog, visit


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