Clive O’Connell, a partner at law firm Goldberg Segalla, discusses the changing ILS scene.
For a few years now, some commentators have responded to the growth of insurance-linked securities (ILS) and the alternative capital that creates it, by asking whether it will survive either a large loss or an increase in interest rates.
A large loss, or at least a large enough loss of the right type, has not occurred. The size of loss that would now buck the system has grown in size and today possibly only a major Californian earthquake would be of sufficient magnitude to have an impact upon the market. Interest rates have not risen and, with deflation looming, are unlikely to rise in the foreseeable future.
The way in which alternative capital operates in the market has also altered to ensure that it would probably survive both a large loss and interest rate increases. In the past, pension and other funds participated in the ILS market in a relatively haphazard fashion, responding to prospectuses put out by investment banks seeking to capitalise bonds protecting insurers and reinsurers. Today those funds have a more strategic view of the market and are more likely to dedicate a sum to be invested by professional managers in ILS and related products.
Clive O’Connell, Goldberg Segalla, ILS