ILS can grow within existing perils: Swiss Re
The insurance linked securities (ILS) markets can seek to grow within the perils it already covers and does not necessarily need to seek new risks yet.
That is the view of Markus Schmutz, head of global ILS structuring and origination, and Judith Klugman, head of global ILS sales, at Swiss Re Capital Markets, ILS sector of Swiss Re.
The pair were speaking ahead of the SIFMA Insurance and Risk Linked Securities Conference, which takes place in New York next week.
“People talk a lot about increasing the available perils, but the reality is that a traditional reinsurer and its rated balance sheet can be a very powerful tool for some of these other types of perils and it’s very hard for the capital markets to compete against a traditional product,” said Klugman.
“I’m not sure that the answer is bringing other perils, but looking at the peak natural catastrophes which could be accessed.”
Schmutz agreed. “Some investors would like to diversify their risks and their funds have investment guidelines which stipulate that they’re supposed to be diversified, but if you look at the investors that are really moving this market forward, they are large fixed income investors that add some ILS to their portfolio of corporate bonds and government bonds, so for them 1 percent of their assets in this markets doesn’t need to be diversified, so we don’t necessarily need to diversify perils to grow the market.”
Klugman explains that with such a large portion of the natural catastrophe market still unpenetrated, the starting block needs to be in that sector, where currently the level of outstanding cat bonds is roughly 10 percent.
“For us the real challenge is that demand from the asset class far exceeds supply and sometimes we have to take a step back and ask how big is the pie, so to speak,” she said.
“For example, the pie is $250 billion natural catastrophe and the level of outstanding cat bonds right now is about $20 billion—10 percent of the overall—so there is a limit as to how much it can grow.
“We need to think about not necessarily transferring different risks into the capital markets, but instead ask where the need for capacity might outstrip what is available in the re/insurance industry.
“If you look at the broader markets and where credit is spread for similar risk profiles, this is still very attractive relative to those bottom markets, which is why we see that demand. So what we’re focused on is how do we increase that pie and reach these peak natural catastrophe risks that aren’t buying insurance.”
To read the full article in Intelligent Insurer’s supplement called ILS from all angles, look out for a copy at the SIFMA conference, or email john.walsh@newtonmedia.co.uk to obtain a digital version.
