UK legislation could encourage ILS issuance

Despite the fact that returns are lower than they once were investors remain keen to participate in insurance-linked securities (ILS), so issuance levels may get a boost from diversification in terms of new risks being securitised as well as from new legislation that may enable the issuance of ILS in the UK, Chi Hum, Guy Carpenter global head of ILS distribution, told Monte Carlo Today.

“The pricing of ILS deals has followed the downward pricing trend in property/casualty in recent years, but it has now bottomed out as levels have reached limits informed by the cost of capital,” Hum explained.

While the market was very active in 2015, levels have reduced in 2016 partly because reinsurers are competing aggressively on pricing, Hum suggested.

Although prices are at relatively low levels, the securities remain attractive for a group of investors which are longer-term oriented, have a more fixed-income return approach and appreciate the lack of correlation with other investments.

In contrast, hedge fund investors looking for very high returns have backed out of the market.

Hum said the type of companies using ILS has also started to change—increasingly, corporates are tapping the market.

“For example, companies such as Amtrak, the Metropolitan Transportation Authority (MTA) in New York or healthcare provider Kaiser Permanente have issued cat bonds as they had difficulties in getting coverage in the insurance market,” he said.

MTA for example, was hit by Hurricane Sandy which flooded lower Manhattan, including subways and tunnels, in 2012. When MTA claimed through its insurers after Sandy, some then said they were overexposed to Manhattan and had to cut back their lines. MTA then decided to enter the capital markets directly, Hum said.

The other advantage of ILS is its ability to cover peak perils. Many insurers and reinsurers already have high exposures to some peak perils.

“When a client needs $500 million or $1 billion cover, re/insurers may struggle to offer cover because their capital management is fixed,” Hum explained.

“As such, more companies may in the future want or need to insure themselves via ILS.”

The ILS market may also get a boost from legislation for issuance of ILS in London. The UK parliament is expected to approve new regulations allowing ILS to be issued in the UK from next year.

“As seen when Bermuda opened the market for cat bond issuance, the UK may streamline the process and therefore encourage issuance,” he concluded.