Growing the ILS pie
The need for continued innovation within the re/insurance industry and the positive efforts around growth were a major theme at Monte Carlo this year - how to meet the challenge of underinsurance and ways to help insurers better tackle emerging exposure areas such as cyber and catastrophe liability were prominent among the topics of discussion.That the industry is at an inflection point for growth is as true for the insurance-linked securities (ILS) markets as it is for re/insurers.
Despite the continued soft market, investor appetite for insurance risk remains strong. Although we’ve seen net new capital come into the re/insurance arena during 2015 at a lower rate than in previous years, with continued downward pressure on reinsurance rates, investor money will continue to flow into the market. Pension funds, sovereign wealth funds and other intuitional investors are still very attracted to the diversification that insurance risk offers.
Broadening the scope
As those in the industry are well aware, the vast majority of the ILS market is invested in US property-catastrophe reinsurance products (see chart), where such peak perils are well modelled and economically viable on a fully collateralised basis. Well-modelled risks such as European windstorm, Japanese earthquake and typhoon have also long had a presence in the market.
More and more, the underlying economics in other areas are also improving, as are the models, and there are real prospects for broadening the scope of products available. Australian and Canadian risks are now being included in transactions. We are seeing deals emerging in Turkey and potentially in the wider Asia-Pacific region outside Japan. China is also an area where we see opportunities in the nearer term.
The strong appetite for investment in diversifying perils was most recently exemplified by the Azzurro Re I catastrophe bond for UnipolSai, the industry’s first ever cat bond to cover Italian earthquake and ensuing perils as a primary risk.
Structured and placed by Willis Capital Markets & Advisory in collaboration with Willis Re, the €200 million ($223 million) bond issued in June was the first to be issued in 2015 exposed to European risk. It was also the first cat bond sponsored by UnipolSai.
The bond provides fully collateralised protection against earthquake risk and ensuing perils in Italy from issuance for three-and-a-half years, with maturity scheduled for January 2019. A small fraction of the exposure—less than 1 percent—is also driven from surrounding regions. This includes France, Monaco, Switzerland, Austria and Slovenia to cover where UnipolSai clients are exposed outside Italy to Italian earthquake risk. In addition, volcanic and tsunami risk was placed within the structure of the bond despite the fact that these perils are as yet unmodelled.
The structure of the bond features an indemnity trigger on a per-occurrence basis, mirroring the traditional reinsurance terms to ensure integration within the overall property-catastrophe reinsurance programme of UnipolSai.
More than 20 investors supported the transaction, which was oversubscribed and upsized from the initial €150 million ($167 million), with the notes paying an annual risk spread of 2.15 percent. This was a record low for a first-time European primary insurance catastrophe bond sponsor of first event indemnity-trigger principal-at-risk notes.
