A jack of all trades
The insurance-linked securities (ILS) sector has continued to advance rapidly in recent years. More complex bond structures are being used and the underlying risks being covered have diversified.
A knock-on effect of this, driven by investors wishing to participate in more complex bonds, has also been a greater sophistication among the fund managers handling these transactions.
“Investors are looking for managers who have the technical confidence to underwrite the availability of product that’s coming to market,” says Paul Schultz, chief executive of Aon Securities.
“So the more it evolves from cat bonds to collateralised reinsurance, the more investors want to know that the managers have enough experience and expertise to underwrite and understand all the risks in the transactions.”
“If there is more evidence to show that around natural catastrophes governments benefit from collecting on cat bonds, then that makes the case stronger for broader use by government entities.”
Schultz says that these demands are responsible for the growing number of hires at these managers, as they seek to attract additional talent to help underwrite.
“As this industry continues to grow, the types of risks are going to be slightly different from those they’ve underwritten in the past,” he says.
“The entities ceding risk into the market are looking to trade with markets or investors that bring more and more to the table. There’s a lot of capacity in the marketplace, so clients are valuing the provision of solutions across a number of products.
“However, consolidation won’t necessarily be due to resources, but due to the fact that clients are looking to achieve greater solutions across the markets with which they trade.”
Despite the wider market seeing a wave of merger and acquisition (M&A) activity, Schultz says that in the ILS sector, there is no need to “force consolidation” just yet.
As the market continues to develop—there is expected to be an uptick in tractions this summer compared with previous years—new entities are constantly moving into the sector.
Governments have shown keen interest in participating in the space, and Schultz hopes that the more evidence that can be gained to demonstrate the potential of governments sponsoring cat bonds, the more issuance there will be.
“If there is more evidence to show that around natural catastrophes governments benefit from collecting on cat bonds, then that makes the case stronger for broader use by government entities,” he explains.
“The fact that these are low frequency events means that you do get the taxpayer argument that governments are spending a lot of money that could be used for more popular initiatives. But in reality, if you’re an entity that’s becoming more leveraged with more debt outstanding, the importance of having more recovery for the large exposures is greater than it’s ever been. It’s a case of balancing current spend versus recovery after a large event.”
As more sponsors enter the market, the general feeling of unease about this asset class is ebbing away although, for the more cautious players, the request for more data remains.
“One way to encourage clients that are unsure as to whether to utilise ILS would be more data points around recovery. If you look at the bonds that have triggered, resulting in losses for investors, that’s a pretty small portion of what’s been issued,” says Schultz.
“I would say it’s consistent with the attachment point, so we’re attaching to cover the infrequent events.
“But there are clients who would like to see more evidence of losses and more evidence of the market paying claims in a consistent way. As this grows, it will bring in new clients.”