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ILS as an investment class could benefit from diversity but this must be done with care. Objective triggers must be created carefully to allow for proper pricing, as Clive O’Connell of McCarthy Denning explains.
In 1992, Hurricane Andrew was the catalyst behind the development of insurance-linked securities (ILS). In 2005, hurricanes Katrina, Rita and Wilma led to the growth and use of ILS solutions. Now, in 2017, hurricanes Harvey and Irma could drive the development of ILS beyond the Gulf of Mexico and US Atlantic coast, and possibly beyond the realm of natural catastrophe.
The recent storms show the use and effectiveness of ILS as a protection product. The insurance and reinsurance industry has been insulated from the significant losses caused by these almost unprecedented storms by alternative capital invested through ILS products. Regulators will look on in the comfortable knowledge that insurers and reinsurers are sufficiently solvent to meet losses at unprecedented levels with little concern about failures. Risk-based capital regimes and the use of ILS within them, have done their jobs.
This proof of the effectiveness of ILS must not go unnoticed by regulators and CFOs. What can assist companies with unexpectedly high losses from natural catastrophes in the Gulf of Mexico, can also help companies facing potential unexpected losses elsewhere in the world and in other risk classes. A truly robust insurance market is one backed by ILS.
Clive, O’Connell, McCarthy Denning, triggers, losses, pricing, ILS