ILS
THE EMERGENCE OF WHOLE PORTFOLIO ILS
The insurance-linked securities market has enjoyed growth and innovation in recent years. A new development spearheaded by Guy Carpenter could revolutionise the way re/insurers interact with the sector. Intelligent Insurer reports.
V
ario Global Capital, the new venture unveiled by Guy Carpenter and Vario Partners, will help create a new asset class of insurance-linked securities (ILS) that will revolutionise the way insurers manage their capital and which could grow
to be six times bigger than the now established asset class of catastrophe- linked bonds, its founders claim.
Nick Frankland, chief executive of Guy Carpenter’s EMEA operations and director of Vario Global Capital, says the venture represents a natural evolution for the reinsurance industry—but that this product could become very important over time as insurers increasingly use it as part of their capital structures.
Vario Global Capital will offer non-life insurers the opportunity to buy high level protection effectively on a quota share basis covering their whole portfolio, using structures very similar to the catastrophe-based ILS deals that are now well understood by investors and cedants alike.
The key function of such deals—which will, almost always, be private placements into the capital markets—will not be risk transfer as such, but capital relief for insurers under Solvency II or equivalent regulatory improved returns on equity.
“This is a natural evolution for the risk transfer industry and it has the potential to be very important and very big,” Frankland says. “If it is as viable and successful as we believe it will be, our estimates suggest that based on take-up levels similar to what we have seen in the cat bond market, but with much larger limits and premiums involved as well.”
Based on the way the needs of cedants have changed in recent years, he believes the appetite is there for this product.
“We have been increasingly acting as an adviser in recent years as clients want to discuss capital optimisation in the same context as risk transfer, and they want to understand the options available to them,” Frankland says.
56 | INTELLIGENT INSURER | November 2015 “We think the industry would have ultimately arrived at this point anyway
but Solvency II has certainly represented a pivotal point in changing the way insurers manage their risks and seek capital relief.
“This new venture will offer some revolutionary solutions on that front.
We believe the investment markets will arrive at a similar point and be receptive to these risks. But we do not see this as a product that would cannibalise traditional reinsurance, since its primary purpose is not risk mitigation.
“Instead, in the same way that cat bonds have ended up complementing traditional reinsurance in the catastrophe risk space, largely providing capacity on peak risks, these bonds will complement the other forms of capital management available to insurers, including traditional quota share arrangements, sidecars, different forms of debt and equity.
“This is not about risk transfer, it is a very different structure from that.”
TRIGGER SOLUTIONS One of the biggest inhibitors that has prevented non-catastrophe risks of establishing a suitable mechanism for a bond being triggered and funds being released. This has always been particularly tricky in relation to long- tail liabilities.
James McPherson, a founding partner of Vario Partners and a director
of Vario Global Capital, explains that his company has developed solutions to this problem using actuarial methodology.
www.intelligentinsurer.com
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