14 September 2016 Alternative Risk Transfer

ILS market remains attractive, claims AlphaCat

The insurance-linked securities (ILS) market has performed well so far in 2016 despite the fact returns are a lot lower than they once were, Lixin Zeng, the head of AlphaCat Managers, Validus Group’s fund management business, told Monte Carlo Today.

“People have also realised that the premium we’re able to charge to assume the same risk has come down quite a bit compared with, say, five years ago. This is what we call a soft market when comparing returns over a time dimension such as four or five years ago,” he said.

“However, if you take a snapshot across different asset classes today and compare their returns, the returns from catastrophe reinsurance are still attractive.”

For this reason, he believes, a meaningful percentage of ILS capital providers are still committed to this asset class.

He added that, in his view, buyers and cedants understand ILS products better now, in terms of the way they work and the benefits and limitations they bring to the market as a whole.

“A cedant used to buying from a traditional reinsurance company expects an evergreen promise to pay. As long as a reinsurance company is solvent you can pick up a claim from 10 years ago.

“For ILS you have to return the collateral after the contract expires, assuming you don’t have a loss to justify holding the collateral. So that’s an area that the buyers carefully evaluate while taking advantage of the lower-cost capital,” he said.

Looking forward, Zeng said one question people like to talk about is the potential for ILS to branch out of the property/catastrophe reinsurance business, where it has gained an increasing market share.

“The answer is yes it can—but not to the same scale,” Zeng said. “We’re already seeing ILS transactions outside the core catastrophe reinsurance area such as specialty reinsurance—aviation and things like that—but I don’t believe that ILS capital can gain scale in those specialty areas.

“The reason that they did in the property/catastrophe area is because they are clearly a lower cost of capital when it comes to the peak catastrophe exposure. Such an advantage does not really exist outside peak zone catastrophe reinsurance, hence its potential is limited for ILS capital.”

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