Exchange-traded risk cat risk moves closer
The reinsurance industry is finally ready to embrace an exchange-traded risk (ETR) platform, according to long-time advocate Tom Johansmeyer.
The ISO assistant vice president believes that ETR is the next stage of development of the insurance-linked securities (ILS) market. Now, he believes he is in touching distance of his dream becoming reality.
“There are conversations taking place at a senior level around ETR,” he said. “If I didn’t see the potential or the opportunity to get to a destination I wouldn’t be still doing this.”
The stumbling block to an ETR platform has always been a difficulty in finding enough parties on both sides of the trade to make a market.
Now, Johansmeyer believes, with greater awareness and education through new developments and placements in the ILS space, this anomaly will be corrected soon.
“What we’re seeing in the ILS space is the sort of innovation that can support itself for years to come,” he said.
Johansmeyer points to traditional reinsurers embracing the use of cat bonds, sidecars and ‘cat bond lite’ as evidence of growing familiarisation with formerly ‘alternative’ capital.
At the same time cedants are benefiting from a wider set of alternatives for accessing capital markets capacity, including cat bond lite and collateralised reinsurance.
“These instruments have helped broaden the cedant base in the capital markets space, and continued education as to the value of various alternatives could help this trend continue. After all, the market requires more original risk to grow.
“This shows what the natural progression could be for ETR. It’s not just a confidence factor, it’s about an evolving business need,” Johansmeyer said.
“Finding new sponsors in this segment will be crucial for ILS growth—both for the publicly managed entity market and the cat bond space as a whole.”
He believes that firms need to move quickly to take advantages of opportunities in the marketplace and are presently constrained by traditional methods of freeing capital for investment.
“The notion is that you have to issue a security to lay off $20 million of risk. There has to be a better way,” he said.
“The ILS market has become large enough and the needs have become sufficiently sophisticated that it can work. It’s all risk transfer and it’s all cat—you manage your risk and you manage your cat bond and it’s a matter of picking the right tools to do that. You need to navigate this market in a way that you are making optimal choices for your book of business.”
He added: “I’m not looking at ETR to do something novel. Novelty is nice but novelty is short. If you have a real, sustainable solution then that is what brings real benefit to the markets.”
