Exchange-traded risk can be a complex area, but one which is proving a key talking point among the industry, as Tom Johansmeyer, AVP – reinsurance services, marketing at ISO/Verisk Insurance Solutions, explains in this month’s insurance-linked securities (ILS) blog.
You have capital to deploy, and you’re looking for a noncorrelated return. It’s not an unusual situation today, with estimates putting target insurance-linked securities (ILS) allocations for global pension funds up to $900 billion. There’s a shortage of risk for this capital to consume, and across the market, innovative minds are looking for new ways to meet that demand. Even outside the ILS sector, the global reinsurance market is looking for new growth opportunities, particularly where returns could be more favorable than they have been in property catastrophe.
Any conversation about reinsurance and ILS industry growth usually finds its way to the concept of “original risk”— the notion that constraints on deal flow are tied to the amount of risk originally transferred into the global insurance and reinsurance system. It’s one of those immovable objects that we desperately want to move, a sort of ‘brute facticity’ as Jean-Paul Sartre would put it (please pardon the flashbacks from university that are bound to come).
Existentialism aside, original risk is a barrier to perceiving the market in the way we’d like to. Capital providers want more opportunity to deploy, and market growth comes from the cedent side of the equation. Within this context, it’s not surprising that chatter about exchange-traded risk is once again swirling around the global reinsurance community. Intuitively, it’s easy to arrive at exchange-traded risk as a solution to the lack of sufficient issuance activity, if only because the thought involves a fully formed market already in action. Unfortunately, exchange-traded risk entails the same difficulties the market is currently experiencing. A capital provider needs a counterpart willing to pay a premium. After all, that’s where the return comes from.
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ILS, ISO, Verisk, exchange-traded risk, Tom Johansmeyer