21 October 2015 News

Traditions and margins repel ILS from Europe—for now

A combination of the market’s more traditional buying habits and lower margins has meant that alternative capital and alternative forms of risk transfer such as insurance-linked securities (ILS) are taking longer to gain a real foothold in Europe. But it will not always be that way.

That is the view of Stephan Ruoff, chief executive officer, Tokio Millennium Re (TMR). He said that while some of the bigger European cedants already use ILS as part of their risk transfer programmes, further penetration is slow compared with markets such as the US and Australia because of these factors.

“We do see more traditional buying patterns among Europe’s cedants,” he said. “On top of this, the multiples in terms of modelled losses to premium you see on European cat business are very low compared with other parts of the world. This also makes the market less attractive to ILS funds,” Ruoff said.

He added that the situation is compounded by the frequency of losses in the market in recent years and the fact that many of the perils are not as well modelled and understood as in other parts of the world.

“In recent years, we have seen Italian quake losses, flood losses in Germany and Denmark, and hail losses in Belgium and France,” he said.

“These are all relatively localised losses that have affected the profitability of the markets but these sorts of perils are not as easily accepted by ILS players. They are less well understood and it limits their participation in this market.”

He said that expertise is essential for any player to operate in this market. On top of this, the situation is made worse by the current intense competition in the market and the effect this has had on rates in the traditional sphere.

He added that while some of the large European buyers have been centralising their panels and changing the nature of their programmes, most of the smaller regional players have remained relationship-driven—something that suits TMR.

“They want to work with a partner who speaks the same language and who is in it for the long haul,” he said. “We offer a value proposition beyond mere financial strength. We want to really understand our clients and we are happy to invest in achieving that. We are very customer-centric in our approach and that is what works in Europe.”

Ruoff added that cedants in Europe also value the diversification TMR offers because it is owned by a Japanese parent.

“We offer a capital base that is a bit different from their usual counterparties,” he said.

Coming back to the theme of ILS and alternative capital, he added that as the dynamics change in Europe, TMR is in a good position to match investors and capital with clients and risks through its newly formed capital solutions unit, formed to develop new capital markets products and leverage the use of technology to transact business with TMR’s capital markets partners.

“That is part of our specific value proposition now,” he said. “We are seeing growing interest in Europe from investors and it is a question of helping cedants understand their risk appetite, the approach of those investors and the mechanisms for transferring risk from traditional reinsurance contracts to something that is tradable.

“We have good expertise in that field as a transformer and I anticipate we will do more of that in Europe in the future. The market is a very competitive environment right now, but over the long term, we will see growth in these areas.”

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